CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 1811:

  Which of the following assumptions is least likely to be consistent with the concept of efficient capital markets?

  A. Expected returns implicitly include risk in the price of the security.

  B. Market participants correctly adjust prices based on new information.

  C. New information about securities comes to the market in a random fashion.

  Correct Answer: B

• Question 1812:

  Sal Nunn, CFA, is a portfolio manager at Walker Investments. Nunn sold 300,000 shares of a NASDAQ listed stock on an electronic crossing network in after hours trading because the company announced a significant negative earnings surprise. Indicate whether the third or fourth market best describes the Nunn trade and state whether the NASDAQ market is a call or continuous market.

  A. Nunn's trade is in the third market and NASDAQ is a call market.

  B. Nunn's trade is in the fourth market and NASDAQ is a call market.

  C. Nunn's trade is in the fourth market and NASDAQ is a continuous market.

  Correct Answer: C

• Question 1813:

  Which of the following is NOT a revenue recognition method when there is uncertainty surrounding the realizability of income?

  A. Completed Contract Method

  B. Cost Recovery Method

  C. Installment Sales Method

  D. Real Estate Method

  Correct Answer: A

  The completed contract method is used for revenue recognition in the case of long-term contracts. In particular, it is chosen instead of the percentage-of-completion method if there are no reliable measures of the degree to which the contract obligations have been fulfilled.

• Question 1814:

  Which of the following would be considered a liability that arises from operating activities?

  A. Taxes payable

  B. All of these answers

  C. Unearned income

  D. Accounts payable

  E. Accrued salaries

  Correct Answer: B

  All of these answers represent liabilities that originate from the operation of a business; i.e., from the normal course of operating a business. Liabilities that arise from "operations" typically do not require compensation in the form of interest. This can be contrasted with liabilities that arise from financing activities where the lender requires the payment of interest to compensate for the extension of credit.

• Question 1815:

  Which of the following best describes retained earnings?

  A. All of these answers.

  B. None of these answers.

  C. Retained earnings represent the cumulative net profits a firm since inception.

  D. Retained earnings represent the sum total of cash obtained from the sale of common stock to investors.

  E. Retained earnings represent the cumulative net profits of a firm since inception, minus cumulative dividends paid to common stockholders.

  Correct Answer: E

  Retained earnings represent the earned capital of a firm. It consists of the accumulated undistributed earnings (net profits, less cash dividends) of a firm since inception.

• Question 1816:

  Which of the following would be reported as an extraordinary item?

  A. uninsured loss from a flood

  B. gain or loss from passing of a new law

  C. all of these answers are correct

  D. gain or loss from early retirement of debt

  Correct Answer: C

  An item must be both unusual and infrequent (and material in amount) to be classified as extraordinary.

• Question 1817:

  Permanent earnings refers to

  A. the net cash flow plus the change in market value of the firm's net assets.

  B. the amount of earnings that can be paid out as dividends without changing the value of the firm.

  C. the level of earnings that can be maintained in the future given the firm's capital investment.

  D. the amount that can be normally earned and equals the market value of the firm's assets times the firm's required rate of return.

  E. the average earnings the firm generates over a specified period.

  F. none of these answers.

  Correct Answer: D

  Permanent earnings is similar to economic earnings; it is the base to which a multiple is applied to arrive at a "fair price."

• Question 1818:

  The par value of a common stock represents

  A. the estimated market value of the stock when it was issued.

  B. none of these answers.

  C. the liability ceiling of a shareholder when a company undergoes bankruptcy proceedings.

  D. the total value of the stock that must be entered in the issuing corporation's records.

  E. the amount that must be recorded on the issuing corporation's record as paid-in capital.

  Correct Answer: C

  Par value represents a stock's legal capital. It is an arbitrary value assigned to stock before it is issued. Par value represents a shareholder's liability ceiling because, as long as the par value has been paid in to the corporation, the shareholder obtains the benefits.

• Question 1819:

  The following financial data on CashCow, Inc. have been taken from its financial statements for 1996: A. Dividends paid $25,000

  B. Sale of land $64,000

  C. Inventory purchases $29,000

  D. Purchase of a warehouse $208,000

  E. Bonds issued $90,000 F Dividends received from investments $17,000

  G. Interest paid on bonds $2,400

  H. Salaries paid $107,400

  I. Cash collection from customers $28,400

  J. Loss on land sale $18,000

  K. Beginning cash balance $312,000

  In the above question, the ending cash balance of the firm was ________.

  A. $157,600

  B. $121,600

  C. $139,600

  D. $172,400

  Correct Answer: C

  Note that the loss on equipment is a non-cash event. Using the direct method, beginning cash balance + net cash inflow = ending cash balance Hence, ending balance = 312,000 + (-25,000+64,000-29,000 208,000 + 90,000 + 17,000 - 2,400 - 107,400 + 28,400) = $139,600.

• Question 1820:

  A firm's financial audit ensures all of the following EXCEPT:

  A. The company is managing its risks within the guidelines specified in its charter.

  B. There are adequate controls and checks in place in its accounting systems.

  C. There are no material errors or omissions in its financial reports.

  D. The management is not misstating its performance.

  Correct Answer: A

  It is not a financial audit function to check on the reasonableness of the risks undertaken by the institution.