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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1231:

  If a firm recognizes expenses before that dictated by accrual accounting, which of the following best describes the effects on income, total assets and retained earnings?

  Income Total Assets Retained Earnings

  I.Understated Understated Understated II.Understated Overstated Understated III.Overstated Understated Overstated IV.Understated Overstated Overstated

  A. III.
  B. IV.
  C. I.
  D. II.
  C. I.

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  Explanation

  Income is understated. Hence, retained earnings and equity are understated. Hence, assets are understated.

• Question 1232:

  Suppose you were given $4,000 today and deposited it into an account paying 8% per year, compounded monthly. If you know that you will need $5,000 in the account 10 years from now, what monthly withdrawal can you make from the account, beginning one month from now, that will leave the account with exactly $5,000 in it in 10 years?

  A. $24. 45
  B. $21.20
  C. $23. 45
  D. Can't be done
  E. $11.23
  B. $21.20

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  Explanation

  On the BAII Plus, press 120 N, 8 divide 12 = I/Y, 4000 PV, 5000 +/- FV, CPT PMT. On the HP12C, press 120 n, 8 ENTER 12 divide i, 4000 PV, 5000 CHS FV, PMT. Note that the answer is a negative number, indicating that this is a monthly withdrawal that can be made from the account in addition to the $5,000 in 10 years. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 1233:

  Which of the following are changes in accounting principle?

  I. a change from LIFO to FIFO

  II. a change in estimated salvage value of depreciable asset

  III. a change from an accelerated depreciation method to straight line depreciation

  IV.

  recording depreciation for first time on machinery purchased five years ago

  A. I, II, III and IV
  B. I, II and III
  C. I, III and IV
  D. I and III
  D. I and III

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  Explanation

  Both I and III involve changes in the method of accounting.

• Question 1234:

  Mileage tests were conducted on a randomly selected sample of 100 newly developed automobile tires. The average tread wear was found to be 50,000 miles with a standard deviation of 3,500 miles. What is the best estimate of the average tread life in miles for the entire population of these tires?

  A. None of these answers
  B. (3,500/100)
  C. 3,500
  D. 50,000
  E. (50,000/100)
  D. 50,000

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  Explanation

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

• Question 1235:

  A firm is purchased for more than the fair market value of its assets. The excess is:

  A. considered a "premium paid" and amortized over the life of the acquired assets.
  B. considered as "Goodwill."
  C. written off against the retained earnings on the balance sheet.
  D. treated as an extraordinary loss and presented net of taxes on the income statement.
  B. considered as "Goodwill."

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  Explanation

  Goodwill is defined as the price paid in excess of the fair market value of the assets of the target firm.

• Question 1236:

  You can enter a derivative contract that will pay $100 at the end of a year if the price of corn exceeds $3 per bushel, or $50 if it is equal to $3 per bushel or lower. The probability that corn will exceed $x by the end of one year is 50%. The current price of the contract is $60, and interest is 5% per year. What is the optimal strategy?

  A. Sell the derivative contract short if corn prices rise.
  B. Invest $60 at 5% until the end of the year.
  C. Buy $3 per bushel worth of corn futures.
  D. Enter into the derivative contract for a cost of $60.
  D. Enter into the derivative contract for a cost of $60.

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  Explanation

  Enter into the derivative contract for a cost of $60, for the expected payoff is 0.50 * $100 + 0.50 * $50 = $75. That is a 25% return on your investment in one year, greater than the 5% that could be made by investing the $60 at interest. This is an example of the investment consequences of inconsistent probabilities. The present value of the contract should be $75/1.05 = $71.43. Thus, an arbitrage opportunity is present. On an expected value basis, you can buy an asset worth $71.43 for only $60.

• Question 1237:

  Holding everything else equal, which of the following firms would likely have a high payout ratio? Further, as time progresses (in the long run), would the retention ratio of similar firms be expected to increase or decrease?

  A. Automobile manufacturer; increase
  B. Specialty retailer; decrease
  C. Pharmaceutical firm; decrease
  D. Specialty retailer; increase
  E. Automobile manufacturer; decrease
  F. Pharmaceutical firm; increase
  E. Automobile manufacturer; decrease

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  Explanation

  Remember that a positive relationship exists between the maturity of an industry and the payout ratio of firms within that industry. The automobile industry is a mature industry, more so than most other industries including pharmaceuticals or specialty retailers. As an industry advances in maturity, growth of the overall industry will decline. As growth opportunities diminish, companies within the industry will be forced to pay out a larger proportion of their earnings as dividends; i.e. the dividend payout ratio of firms within the industry will increase. Remember that the retention ratio is equal to (1 - the dividend payout ratio). Thus, the retention ratio of companies will likely decline as the industry advances in maturity. The relationship between the dividend payout ratio and the maturity of the industry is negative and loosely linear. As an industry becomes more mature, growth opportunities decline. This relationship is also loosely linear.

• Question 1238:

  Which one of the following will most likely cause a future increase in the growth rate of real output?

  A. an increase in income redistribution payments from high- to low-income recipients
  B. discovery of a new low-cost method of converting oil shale into petroleum
  C. higher marginal tax rates
  D. a decrease in the economy's net investment rate
  B. discovery of a new low-cost method of converting oil shale into petroleum

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  Explanation

  Improvements in technology that permit us to squeeze a larger output from a specific resource supply enhance our productivity and thereby shift the long run aggregate supply curve to the right.

• Question 1239:

  In allowing a claim of being in compliance with the PPS, AIMR requires that the compliance be on a "firmwide" basis. Which of the following does not qualify as "a firm" in this requirement?

  A. A subset of assets managed in one or more base currencies.
  B. An entity registered with the appropriate regulatory authority.
  C. A subsidiary or a division of a parent organization.
  D. None of these answers.
  A. A subset of assets managed in one or more base currencies.

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  Explanation

  The entire subset of a firm's assets which are managed in one or more bases currencies must be included in the definition of "a firm" as far as PPS is concerned. For example, an organization cannot claim a proper subset of the assets it manages in Netherlands as "a firm" and claim compliance for that subset. It must include the entire portfolio managed in the Netherlands Guilders.

• Question 1240:

  The corporate finance division of Intelligent Semiconductor is examining the firm's recent sales in an attempt to forecast future operating performance. In their investigation, the management of the firm's corporate finance division have identified the following sales and EBIT information for the previous two years: Sales in year 1 $1,200,000 Sales in year 2 $1,500,000 EBIT in year 1 $400,000 EBIT in year 2 $550,000 Given this information, what is the degree of operating leverage for Intelligent Semiconductor for this period?

  A. .350
  B. 1.25
  C. .3667
  D. .3333
  E. 1.50
  E. 1.50

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  Explanation

  To calculate the degree of operating leverage (DOL), use the following equation: {% change in EBIT/% change in sales}. Incorporating the given information into this equation yields the following: {[(year 2 EBIT $550,000 - year 1 EBIT $400,000)/year 1 EBIT $400,000]/[(year 2 sales $1,500,000- year 1 sales $1,200,000)/year 1 sales $1,200,000] = 1.50