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

• Question 1821:

  The loss from an uncollectible account is:

  A. an asset

  B. a liability

  C. a regular expense of doing business

  D. a reduction in revenue

  Correct Answer: C

  The benefit from selling on credit to customers far outweighs the cost of losses from uncollectible accounts. These losses are a regular expense of doing business.

• Question 1822:

  Topaz Metals Inc. produces precious metals from its mining operations. The selling price for its product is reasonably assured, the units are interchangeable, and the costs of selling and distributing the product are insignificant. In order for Topaz to recognize revenue as early in the revenue cycle as is permitted under generally accepted accounting principles, the revenue recognition method that Topaz should use is the ________.

  A. percentage-of-completion method

  B. production method

  C. cash method

  D. completed-contract method

  E. cost recovery method

  Correct Answer: B

  Revenue is recognized when the conditions of "realized" or "realizable" and earned are met. If products are readily realizable because they are salable at reliably determinable prices without significant effort, revenues may be recognized at completion of production.

• Question 1823:

  A firm has to pay 1,000 to its suppliers in one year. The interest rate on this liability is 9%. The current liability recorded by the firm is ________.

  A. 1,090

  B. 90

  C. 1,000

  D. 917

  Correct Answer: C

  Current liabilities, in general, are recorded at the principal portion of the payment. Hence, even though the firm in this case will have to pay 1,090 in 1 year, the current liability equals the principal portion = 1,000.

• Question 1824:

  What is the purpose of information presented in notes to the financial statements?

  A. To provide disclosures required by generally accepted accounting principles.

  B. To present management's responses to auditor comments.

  C. To provide recognition of amounts not included in the totals of the financial statements.

  D. To correct improper presentation in the financial statements.

  E. None of these answers.

  Correct Answer: A

  Users of the financial information are the focus of financial reporting. GAAP requires disclosures in the notes to facilitate the users' understanding of the financial statements.

• Question 1825:

  In a common size statement, a firm shows average receivables of 9.3%. Its receivables turnover equals

  1.23. What's the average receivables collection period?

  A. 296.8 days

  B. insufficient information

  C. 321.6 days

  D. 184.3 days

  Correct Answer: A

  Average receivables collection period = 365/receivables turnover. In this case, the collection period = 365/1.23 = 296.8 days.

• Question 1826:

  Which of the following appear(s) on the Income Statement?

  I. Interest revenue.

  II. Depreciation of a machinery.

  III. Employee payroll taxes payable.

  IV.

  Commissions earned by sales staff.

  A.

  III only

  B.

  I, II and IV

  C.

  II and IV

  D.

  I and III

  Correct Answer: B

  Employee payroll taxes payable are a current liability.

• Question 1827:

  To carry out a comparative analysis of a firm's financial statements over a period of more than 3-4 years, one should use ________.

  A. year-to-year change analysis

  B. horizon analysis

  C. ratio analysis

  D. index-number trend analysis

  Correct Answer: D

  To carry out a comparative statement analysis over a long period of time, you can express the financial statement numbers in terms of a common base. This base could be one of the years for which financial statements are available or can be arbitrarily set to a number like 100. This process then converts the financial statement quantities into indices and these can be analyzed more conveniently.

• Question 1828:

  A firm wants to decrease its debt-to-asset ratio without affecting its current ratio. Which of the following actions can it undertake?

  I. Retire some of its outstanding bonds by using proceeds from the sale of old assets.

  II. Increase sales on credit.

  III. Pay off a part of the "salaries payable" account using cash.

  IV.

  Issue new stocks and invest the proceeds to purchase a production plant.

  A.

  I, II and III

  B.

  I and IV

  C.

  IV only

  D.

  II and III

  Correct Answer: C

  Both "accounts receivable," which represents sales on credit and "salaries payable" are current accounts. Therefore, if you do not want to affect current ratio, II and III are not acceptable strategies. When old assets are sold and the proceeds used to retire outstanding bonds, the debt-to-asset ratio decreases. This is because debt/asset ratio is almost always less than 1 (we will ignore abnormal cases where book equity can go negative; e.g. the case where the firm keeps borrowing and paying out the proceeds as dividends). Hence, when both numerator and denominator are decreased, the ratio decreases. However, the current portion of the long-term debt also gets retired, increasing the current ratio. So I is also not an acceptable strategy, though at first glance it appears so. With IV, debt is unaffected but assets increase, decreasing the debt/asset ratio.

• Question 1829:

  When the Percentage of Sales method is used, the estimated bad debt expense is calculated by

  A. dividing total sales on account by the percentage

  B. subtracting the percentage of net sales on account from the balance of allowance for uncollectible accounts

  C. multiplying total sales on account times the percentage

  D. multiplying net sales on account times the percentage

  Correct Answer: D

  This method bases the period adjustment on a percent of net sales on account for the period.

• Question 1830:

  The interest expense on a discount bond _______ over time.

  A. decreases

  B. remains constant

  C. can increase or decrease, depending on interest rate movements

  D. increases

  Correct Answer: D

  Remember that the book value of the liability of any straight bond equals the face value at maturity. Hence, when the bond is issued at a discount, the discount amount is amortized over the life of the bond. The outstanding liability thus increases steadily toward the face value. The increasing liability increases the interest expense over time.