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

• Question 1851:

  Birch Ltd. had net income for the year of $101,504 and a simple capital structure consisting of the following common shares outstanding:

  Months OutstandingNumber of Shares

  January – February 24,000 March – June 29,400 July – November 36,000 December 35,040

  Assume Birch issued a 20% stock dividend on August 1st. In this case, earnings per share (rounded to the nearest cent) were

  A. $2.72

  B. $2.67

  C. $2.88

  D. $4.23

  E. $2.41

  Correct Answer: B

  Following is the calculation for the weighted average number of shares outstanding (before the 20% stock dividend):

  24,000 X (2 / 12) = 4,000 29,400 X (4 / 12) = 9,800 36,000 X (5 / 12) = 15,000 35,040 X (1 /12) = 2,920 weighted average 31,720

  Stock dividends are assumed to have occurred at the beginning of the year. Thus, the weighted average number of shares equals the amount before the stock dividend plus 20% more which is equal to 38,064 (31,720 + 20% X 31,720). EPS equals net income divided by the weighted average number of shares outstanding which is $2.67 ($101,504 / 38,064).

• Question 1852:

  When merchandise inventory is purchased under a perpetual system, which account is debited?

  A. Cash

  B. Merchandise Inventory

  C. Accounts Payable

  D. Purchases

  Correct Answer: B

  The perpetual inventory system records purchases of merchandise inventory directly into a balance sheet account called Merchandise Inventory.

• Question 1853:

  The weighted average method is based on the assumption that the cost of merchandise sold should be calculated using the:

  A. average price of beginning inventory plus purchases during the period

  B. average price per unit of ending inventory

  C. average price per unit of beginning inventory

  D. average price of ending inventory plus purchases during the period

  Correct Answer: A

  Under the weighted average method, inventory is priced at the average cost of the goods available for sale (Beginning inventory plus purchases during the period).

• Question 1854:

  A dividend that distributes more than 25% of the outstanding shares before the dividend is called:

  A. a liquidating dividend

  B. illegal

  C. a large stock dividend

  D. a capitalizing dividend

  Correct Answer: C

  Large stock dividends distribute greater than 25% of outstanding shares before the dividend and small stock dividends distribute less than or equal to 25% of previously outstanding shares.

• Question 1855:

  The loss from an uncollectible account is

  A. an asset

  B. a regular expense of doing business

  C. a liability

  D. a reduction in revenue

  Correct Answer: B

  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 1856:

  If the estimated life of a long-term asset is increased, which of the following is true?

  I. The depreciation expense increases

  II. Taxes decrease

  III. Income increases

  IV.

  Cashflow decreases

  A.

  I and II

  B.

  III and IV

  C.

  I and III

  D.

  I, III and IV

  Correct Answer: B

  The increase in the asset's life estimate decreases the depreciation expense. Hence, income increases, taxes increase and cashflow decreases (due to higher taxes).

• Question 1857:

  Which of the following best describes a balance sheet?

  A. None of these answers.

  B. A balance sheet reports changes over a period of time in component accounts that comprise the ownership of a firm.

  C. A balance sheet summarizes the financial position of a company at a given point in time.

  D. A balance sheet details the cash inflows and outflows that are related to a company's operating, investing, and financing activities over a period of time.

  E. A balance sheet measures a company's financial performance over a specified period of time.

  Correct Answer: C

  A balance sheet provides a detailed listing of a company's assets, liabilities, and equity at a point in time. This provides a glimpse at a company's financial condition.

• Question 1858:

  Which of the following is not a common tool used in financial statement analysis?

  A. trend series analysis

  B. random walk analysis

  C. common size statement analysis

  D. ratio analysis

  Correct Answer: B

• Question 1859:

  Irwin Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums saved minus recognized losses from lawsuits and other claims. As a result of a 1996 accident, Irwin is a defendant in a lawsuit in which it will probably have to pay damages of $190,000. What are the effects of this lawsuit's probable outcome on Irwin's 1996 financial statements?

  A. An increase in expenses and no effect on liabilities.

  B. No effect on expenses and an increase in liabilities.

  C. An increase in both expenses and liabilities.

  D. None of these answers.

  E. No effect on either expenses nor liabilities.

  Correct Answer: C

  Since the outcome of the lawsuit is probable and estimable, the amount of $190,000 will be recorded in the financial statements as a contingent liability and an expense.

• Question 1860:

  The cash flow statement provides more objective information about all of the following, except

  A. trends in cash flow components.

  B. management decisions regarding financial policy, dividend policy, and investment for growth.

  C. a firm's ability to generate cash flows from operations.

  D. cash consequences of investing and financing decisions.

  E. the amount a firm can be leveraged.

  Correct Answer: E

  In this case balance sheet data must be used to determine the answer.