11/18/24, 12:13 AM SU 6-Prep :: Kaplan Middle East, CMA 1-2023 :: CMA Part 1 Review Course

Kaplan Middle East, CMA 1-2023 :: CMA Part 1 Review Course

Study Unit 6-Prep

[ 1 ] The primary purpose of integrated reporting (IR) is to

A. Explain to providers of financial capital how value is created by the company over
time.
B. Give customers holistic information about the company and its values.
C. Report about nonfinancial aspects of the company.
D. Meet the requirements of regulators.

[ 2 ] Through integrated reporting, a company

A. May disclose the effects of externalities on capitals owned by the company.

B. Is limited to including only material value created for itself.
C. Communicates implementation of strategies, corporate governance, performance,
and prospects leading to value creation.
D. Combines the sustainability report with the corporate social responsibility report.

[ 3 ] Which of the following is a true statement about value creation for integrated
reporting (IR) purposes?

A. Value creation is a process based on integrated thinking resulting in an integrated

report.
B. Understanding how financial and nonfinancial factors interact affects decisions about
value creation.
C. An integrated report explains how the interdependent financial aspects of a company
interact in the value-creation process.
D. The main goal of IR is to disclose financial information to improve accountability.

[ 4 ] The fundamental concepts defined in the <IR> Framework are

A. Value creation, the value-creation process, and the six capitals.

B. Business activities, the value-creation process, and materiality.
C. The six capitals, the business model, and the external environment.
D. External environment, the business model, and materiality.

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[ 5 ] According to the <IR> Framework, value creation depends on sources known as

capitals. Which of the following is a true statement about the capitals?

A. Every company should address the six capitals in its integrated report.
B. The capitals are affected by the regular course of business.
C. Value is necessarily measured in financial capital.
D. Value creation occurs only when the total of the capitals increases.

[ 6 ] According to the <IR> Framework, manufactured capital is a source of value creation

for a company. Manufactured capital

A. Consists of the environmental resources used.

B. Is obtained through financing.
C. Need not be owned.
D. Must be presented in an integrated report.

[ 7 ] According to the Integrated Reporting Framework, the six capitals are affected by the

A. Outcomes of interactions with customers.

B. Financial returns to the providers.
C. Regular course of business.
D. Relations with stakeholders.

[ 8 ] A leading manufacturer of electric vehicles has accumulated customer driving

interaction data through its unique pilot driver-assist program. This data will be used to
further develop more advanced autonomous features that the company plans to
implement in the near future on its most popular model. In integrated reporting, the
system used to accumulate and analyze the driving data is best categorized as

A. Human capital.
B. Intellectual capital.
C. Natural capital.
D. Manufactured capital.

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[ 9 ] Which question posed in the <IR> Framework relates to strategy and resource
allocation?

A. What challenges and uncertainties is the organization likely to encounter in pursuing

its strategy?
B. To what extent has the organization achieved its strategic objectives for the period?
C. How does the organization determine what matters to include in the integrated
report?
D. Where does the organization want to go and how does it intend to get there?

[ 10 ] One of the questions posed in the Integrated Reporting Framework is, “What does
the organization do, and what are the circumstances under which it operates?” An aspect
of the related Content Element includes

A. Leadership structure.
B. Mission and vision.
C. Business model.
D. Risks and opportunities.

[ 11 ] The business case for adoption of integrated reporting (IR) most likely includes

A. Universally accepted standards for value creation.

B. Linkage of financial and nonfinancial information.
C. Use of a single-capital approach.
D. Less emphasis on the importance of the tone at the top.

[ 12 ] Which of the following is a potential advantage of integrated reporting (IR)?

A. Reduction of costs by establishing new control systems.

B. Better control systems for financial information.
C. Less emphasis on the materiality of nonfinancial information.
D. Providing assurances on nonfinancial information.

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[ 13 ] The greatest challenge for an organization that adopts integrated reporting (IR) is

A. Defining materiality for providers of financial capital.

B. The unwillingness of stakeholders to accept the new reporting form.
C. Full involvement of the CEO and the board.
D. Data quality of financial information.

[ 14 ] The business case for integrated reporting (IR) most likely includes

A. More reliable assurance on decision making and financial and nonfinancial

information.
B. Better stakeholder relations, better resource allocation, and greater assurance
provided by the integrated report.
C. More committed customers and more engaged employees.
D. Lower costs, more providers of financial capital, and better decision making.

[ 15 ] Which of the following is a challenge of adopting integrated reporting (IR)?

A. Connectivity of financial and nonfinancial information.

B. Better resource allocation.
C. Lower reputational risk.
D. Filtering the increased information available to users.

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Answer Explanations for Question 1:

A. *Correct Answer* IR is defined as “a process founded on integrated thinking, which
results in a periodic integrated report by an organization about value creation and
preservation in the short, medium, and long term.” It is primarily focused on giving holistic
information to the providers of financial capital about how the entity creates value over
time.
B. Customers benefit from IR as a stakeholder group. But its main goal is to provide
information about value creation to providers of financial capital.
C. An integrated report is designed to provide a holistic view of the company by
connecting financial and nonfinancial information with the long-term value-creation
possibilities of the organization.
D. Regulatory institutions may require companies to report in an integrated manner. But
regulatory compliance is not the primary purpose of IR. Moreover, stakeholders
(interested parties) also include customers, employees, suppliers, and local communities.

Answer Explanations for Question 2:

A. Externalities are the effects on the capitals not owned by the company itself. These
can be positive or negative. Externalities need to be included in the integrated report as
well.
B. When the value created by the company for itself or for others is material, it should be
incorporated in the integrated report.
C. *Correct Answer* Through IR, a company communicates implementation of
strategies, corporate governance, employee and management performance, and
prospects that lead to value creation over time. In the context of the entity’s external
environment, IR communicates how value is created by providing a combination of
financial and nonfinancial information. Thus, IR enables a company to tell its own unique
story of value creation.
D. An integrated report is not a mere combination of the annual report with a separate
sustainability or corporate social responsibility report or a combination of the
sustainability and social responsibility reports.

Answer Explanations for Question 3:

A. IR is “a process founded on integrated thinking, which results in a periodic integrated
report by an organization about value creation and preservation in the short, medium,
and long term.” The value-creation process itself has five elements: (1) inputs, (2) the
business model, (3) business activities, (4) outputs, and (5) outcomes.
B. *Correct Answer* Integrated thinking is a prerequisite to IR. Understanding the
influences of financial and nonfinancial factors on each other is necessary to (1) report in
an integrated manner about performance and (2) make well-informed decisions for long-
term value creation.
C. An integrated report defines the interdependencies between financial and nonfinancial
aspects of a company and explains how they interact in the value-creation process.
D. The main goal of traditional corporate reporting is to disclose financial information to
improve transparency and accountability.

Answer Explanations for Question 4:

A. *Correct Answer* The value-creation process is the core of the integrated report. It
shows how companies create financial and nonfinancial value over time. This value is
created not only for the company itself but also for others. It is influenced by the external
environment, relations with stakeholders, and various resources (e.g., the six capitals).
B. Business activities in the business model (an element of the value-creation process)
transform inputs to outputs. Moreover, material value should be included in the integrated

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report. However, business activities and materiality are not fundamental concepts as
defined by the IIRC.
C. The business model is an element of the value-creation process. Inputs to the
business model are transformed by the business activities in the model to outputs. The
external environment is a factor affecting the entity’s ability to create value. But the
business model and the external environment are not fundamental concepts as defined
by the IIRC.
D. The external environment is a factor affecting the entity’s ability to create value, and
the business model is an element of the value-creation process. Material value should be
incorporated in the integrated report. However, the external environment, the business
model, and materiality are not fundamental concepts as defined by the IIRC.

Answer Explanations for Question 5:

A. Not all capitals are equally important for every company or even relevant. Thus, all six
capitals need not be present in every integrated report.
B. *Correct Answer* The value of the capitals may change in form, increase, or
decrease as a result of the activities and outputs of the company in the regular course of
business. For example, one capital may need to decrease for another to increase.
Furthermore, value may be created over different capitals and is not necessarily
measured in financial terms. Also, value creation is viewed not only as an increase in the
total of the capitals but also as preservation of their aggregate value.
C. Value is not always measured in financial terms. Value also may be created and
measured using nonfinancial metrics.
D. Value creation is viewed not only as an increase in the total of the capitals but also as
preservation of their aggregate value.

Answer Explanations for Question 6:

A. Natural capital consists of the renewable and nonrenewable environmental resources
that are used, produced, or affected by the company.
B. The financial capacities of a company are obtained through financing (financial
capital).
C. *Correct Answer* Manufactured capital is every tangible object possessed by
(available to) a company, whether or not owned. Examples are roads and ports.
D. The categorization by the IIRC is a guideline for preparing an integrated report and
describing the value-creation process. All capitals need not be present in every report.

Answer Explanations for Question 7:

A. Outcomes are the effects of business activities and outputs on the six capitals. They
are internal and external consequences (positive or negative) for capitals. For example,
interactions with customers may increase, decrease, or transform financial capital. But
other capitals, e.g., manufactured capitals or natural capitals, may not be changed.
B. Value created may be in the form of financial returns to the providers of financial
capital. But other sources of value are not necessarily measured in financial capital.
C. *Correct Answer* The six capitals are affected by the regular course of business.
They are increased, decreased, or transformed by the activities and outputs of the
organization.
D. An entity’s value-creation process is influenced by relations with stakeholders and the
external environment in which the company operates. However, although these factors
affect social and relationship capital, they do not necessarily affect all of the other
capitals.

Answer Explanations for Question 8:

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A. Human capital consists of employees’ competencies, capabilities, experience, and

ability to innovate.
B. *Correct Answer* Intellectual capital is the intangible knowledge of the organization. It
includes intellectual property (e.g., patents, copyrights, and software) and organizational
capital (e.g., systems, procedures, and protocols).
C. Natural capital consists of the renewable and nonrenewable environmental resources
and processes that provide goods or services supporting the prosperity of the entity.
D. Manufactured capital includes manufactured, not natural, tangible objects available to
an entity even if they were created by other entities.

Answer Explanations for Question 9:

A. An integrated report should answer the question about the outlook Content Element as
follows: “What challenges and uncertainties is the organization likely to encounter in
pursuing its strategy, and what are the potential implications for its business model and
future performance?”
B. An integrated report should answer the question about the performance Content
Element as follows: “To what extent has the organization achieved its strategic objectives
for the period, and what are its outcomes in terms of effects on the capitals?”
C. An integrated report should answer the question about the basis of preparation and
presentation Content Element as follows: “How does the organization determine what
matters to include in the integrated report, and how are such matters quantified or
evaluated?”
D. *Correct Answer* An integrated report should answer the question about the strategy
and resource allocation Content Element as follows: “Where does the organization want
to go and how does it intend to get there?”

Answer Explanations for Question 10:

A. Leadership structure is an aspect of the Content Element of governance.
B. *Correct Answer* The aspects of the Content Element of organizational overview and
external environment include (1) the market in which the company operates, (2) its
mission and vision, (3) its competitive landscape, (4) key quantitative information, (5)
needs of stakeholders, (6) changes in the external environment, and (7) how the
company deals with these external changes.
C. The business model is a Content Element.
D. Risks and opportunities is a Content Element.

Answer Explanations for Question 11:

A. Universally accepted standards for measuring and reporting on value creation and
nonfinancial information do not currently exist.
B. *Correct Answer* An integrated report is intended to provide a holistic view of an
entity. It connects financial and nonfinancial information with the long-term value-creation
potential of the entity.
C. A fundamental concept of IR is that value creation has six capitals (sources):
(1) financial, (2) manufactured, (3) intellectual, (4) human, (5) social and relationship, and
(6) natural.
D. The most important requirement for the success of IR is the support of the CEO and
the board of directors (the tone at the top).

Answer Explanations for Question 12:

A. Reduction of costs by establishing new control systems may result in higher costs in
the short term.
B. A benefit of IR is better controls over nonfinancial information.

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C. The almost unlimited amount of nonfinancial information requires an assessment of

materiality before it is reported.
D. *Correct Answer* Providing assurance on nonfinancial information, the amount of
which is unlimited, is difficult. However, validating the integrated presentation of financial
and nonfinancial information is important. Assurance on IR enhances the quality of the
reports and their comparability among organizations. A similar benefit results from an
auditor’s opinion on financial information.

Answer Explanations for Question 13:

A. *Correct Answer* Management needs to decide what information the providers of
financial capital and other users want. Because IR uses a multi-capital approach, a user
needs information that has passed through a materiality filter. This material information
should be useful to providers of financial capital and other users. However, defining
materiality for often voluminous nonfinancial information is difficult but still essential.
Thus, each organization needs to develop an effective materiality definition process.
B. An integrated report should be beneficial for stakeholders. It should improve
stakeholder relations by providing a holistic view of the entity that connects nonfinancial
and financial information with its value-creating potential.
C. A lack of support from senior management and the directors signifies a negative tone
at the top. Accordingly, their full involvement reduces the challenges of adopting IR.
D. Data quality tends to be better for financial than nonfinancial information, especially
when new metrics are introduced.

Answer Explanations for Question 14:

A. IR is typically related to a more complex assurance process, so assurance is not
necessarily more reliable for integrated reports.
B. IR is typically related to a more complex assurance process. Thus, the assurance
provided is not necessarily greater for integrated reports.
C. *Correct Answer* IR is a process of combining the interactive concepts of integrated
thinking, integrated reporting, and value creation. It enables a company to demonstrate
implementation of strategies, governance, employee and management performance, and
prospects leading to value creation. Value creation benefits not only the organization but
also improves relations with stakeholders (interested parties), such as customers,
employees, regulators, suppliers, and providers of financial capital. Accordingly,
customers will be more committed and employees more engaged if a company can
demonstrate its effectiveness in creating value.
D. Although the integrated report is written for providers of financial capital, its publication
does not necessarily result in more providers of financial capital.

Answer Explanations for Question 15:

A. The linkage (connectivity) of financial and nonfinancial information is a benefit of IR.
B. Better resource allocation is a benefit of IR.
C. Lower reputational risk is a benefit of IR.
D. *Correct Answer* IR uses a six-capital approach to value creation. Consequently, IR
must filter the increased information available through a properly defined level of
materiality. For example, a definition of materiality may be based on what providers of
financial capital need to know.

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