CFA Institute CFA-LEVEL-1 Online Practice Questions and Exam Preparation

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1021:

  Projecting a firm's net profit margin should include an analysis of:

  A. all of these answers
  B. the firm's relationship with its industry, which should indicate whether the company's past performance is attributable to its industry or if it is unique to the firm
  C. the firm's specific competitive strategy, either low cost or differentiation
  D. the firm's internal performance, including general company trends and consideration of any problems that might affect its future performance
  A. all of these answers

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  Explanation

  These three examinations help in understanding the firm's past performance and provide the background to make meaningful estimates for the future.

• Question 1022:

  On Jan. 1, DataCom prepays $3,000 rent for Mar. 1, June 1, and Sept.

  1. Under accrual basis accounting, what is the impact on the Feb. financial statements?

  A. $3,000 expense
  B. $1,000 decrease in net income
  C. no impact
  D. an increase to current assets of $1,000
  B. $1,000 decrease in net income

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  Explanation

  In order to match expenses with revenues for the period, the cost of prepaid insurance should be allocated to each accounting period. The asset value is decreased (credit), and an expense is recognized (debit), thus decreasing net income.

• Question 1023:

  Kep Polznik is a financial consultant to an entrepreneur who owns a chain of check-cashing establishments (individuals who meet certain criteria can cash post-dated checks and then repay the money at a later date). The company's Treasurer is considering using plain vanilla swaps. Which of the following statements should Polznik NOT use to sell the Treasurer on the use of interest rate swaps?

  A. The Treasurer can use swaps to exploit market inefficiencies.
  B. The swap market's operational efficiency results in reduced transaction costs.
  C. Swap agreements allow companies a more flexible way to package cash flows.
  D. By using swaps, the Treasurer can maintain the confidentiality of business strategy.
  A. The Treasurer can use swaps to exploit market inefficiencies.

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  Explanation

  Exploiting market inefficiencies is no longer considered a motivation for entering into swap agreements. Historically, there were two basic motivations for swaps, to exploit market inefficiencies and to attempt to obtain cheaper financing. Both were based on the belief that financial markets are inefficient. Today, the swap markets have matured and there are few arbitrage opportunities. The swap markets are considered operationally efficient and flexible. Thus, the main reasons to enter into swap agreements include: to reduce transaction costs, to avoid costly regulations, and to maintain privacy.

• Question 1024:

  Inflation is problematic for which of the following reasons

  I. Purchasing power declines at a faster rate than incomes rise

  II. Inflation causes nominal interest rates to rise

  III.

  Inflation creates a disincentive to enter into otherwise beneficial long-term agreements

  A. I, III
  B. I only
  C. II, III
  D. III only
  E. III only
  F. I, II, III
  D. III only

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  Explanation

  Inflation generally implies that all prices, including the price of labor, increase at the same rate.

  Therefore inflation does not cause a real decline in income. Although nominal interest rates would rise with increased inflation, this does not cause a fundamental economic problem. However, because inflation tends to create long-term

  uncertainty, many long-term agreements are foregone that would otherwise be beneficial.

• Question 1025:

  Which inventory costing method is most useful in estimating the amount of inventory lost or destroyed by theft, fire, or other hazards?

  A. FIFO
  B. None of these answers
  C. average cost method
  D. gross profit method
  E. LIFO
  D. gross profit method

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  Explanation

  The historical relationship between cost of goods sold and sales is applied to sales of the current period as a way of estimating COGS during the current period. COGS is then subtracted from the cost of goods available for sale to get the estimated cost of the ending inventory.

• Question 1026:

  The following information is from the financial statements of Complex Capitalists for 1997 and 1998:

  Dec. 31, 1997 - 1 million common shares outstanding, capital structure all-equity

  March 31, 1998 - issued 200,000 common shares.

  May 31, 1998 - issued 800,000 warrants exercisable at a strike of 35.

  The stock price on Dec. 31, 1998 was 37. The average price during 1998 was 34 and the maximum price was 39. How many shares will the basic EPS computation for 1998 use?

  A. 2. 0 million
  B. 1.15 million
  C. 1.2 million
  D. 1.617 million
  B. 1.15 million

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  Explanation

  Basic EPS will ignore the warrants and calculate the weighted number of common stock outstanding for 1998. The newly issued share were outstanding for 9 months and hence weighted # of shares used = 1 million + 3/4*200,000 = 1.15 million.

• Question 1027:

  The __________ is the most conservative of the following liquidity ratios.

  A. current ratio
  B. quick ratio
  C. cash ratio
  D. liquid ratio
  C. cash ratio

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  Explanation

  The cash ratio is the most conservative of the 3 liquidity ratios since it considers only cash and marketable securities relative to the current liabilities.

• Question 1028:

  An experiment involves selecting a random sample of 256 middle managers at random for study. One item of interest is their mean annual income. The sample mean is computed to be $35,420 and the sample standard deviation is $2,050. What is the point estimate?

  A. $138.36
  B. None of these answers
  C. $2,050
  D. $34,520
  E. $35,420
  E. $35,420

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  Explanation

  The sample mean is a good estimate for the population mean.

• Question 1029:

  Which of the following statements about portfolio management is TRUE?

  A. Investment constraints include liquidity, time horizon, taxes, legal and regulatory concerns, and unique characteristics such as concern for social issues.
  B. The order of the four step investment process is: analyze current financial and economic conditions, specify goals and constraints, allocate assets across asset classes, and monitor and rebalance the portfolio as needed.
  C. An investor's portfolio (in the spending and gifting phase) should contain a sizable portion of equities to preserve capital over the long term.
  D. The investment performance should be judged based on the raw portfolio return.
  A. Investment constraints include liquidity, time horizon, taxes, legal and regulatory concerns, and unique characteristics such as concern for social issues.

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  Explanation

  This statement is true.

  The steps of the investment process are listed in the incorrect order. The order should be as follows: specify goals and constraints (write a policy statement), analyze current financial and economic conditions (develop investment strategy),

  allocate assets across asset classes (implement the plan), monitor and rebalance the portfolio as needed (monitor and update). In the spending and gifting phases, investor portfolios generally less in equities as investors seek lower risk

  securities. Performance should be judged using an objective, benchmark standard ?not the raw portfolio return.

• Question 1030:

  Which of the following statements about margin is false?

  A. The initial margin must be posted within three days of the trade.
  B. Each trader's margin account is marked-to-market at the end of every day to reflect any gains and losses they have experienced for that day.
  C. If the margin account balance falls below the maintenance margin level, the trader must bring it back up to the initial margin level.
  D. The initial margin on a contract approximately equals the maximum daily price fluctuation of the contract.
  A. The initial margin must be posted within three days of the trade.

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  Explanation

  Margin must be posted before the trade.