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

• Question 1861:

  Which of the following would not be included as a liability on a corporate balance sheet?

  A. Accrued liabilities

  B. Current portion of long-term debt

  C. Accounts payable

  D. Marketable securities

  E. Notes payable

  Correct Answer: D

  Marketable securities are not a liability; it represents the value of a company's investment in stocks bonds and money market instruments.

• Question 1862:

  The Income Statement:

  I. reflects the current operating performance of the firm.

  II. indicates whether the firm is healthy and growing or not.

  III. explains the changes in assets, liabilities and Equity of the firm.

  IV.

  is a snapshot of a firm's operations at a given time.

  A.

  I, II, III and IV

  B.

  II and III

  C.

  I only

  D.

  I and IV

  Correct Answer: C

  II needs a cash flow statement, in addition. III is not true since the Income statement does not contain all the details which pertain to changes in assets and liabilities. Finally, an income statement shows the performance over a time period and is hence, not a "snapshot" of operations.

• Question 1863:

  Cash outflows for payment of cash dividends is an example of:

  A. cash flows from financing activities

  B. cash flows from investing activities

  C. cash flows from noncash investing and financing activities

  D. cash flows from operating activities

  Correct Answer: A

  Providing stockholders with a return on their investment in the form of a cash dividend is a financing activity.

• Question 1864:

  Why do the corporation's directors declare stock dividends?

  A. to increase the number of shares outstanding

  B. all of these answers are correct

  C. to keep the market value of the company's stock affordable

  D. to provide tangible evidence of management's confidence in the company's strong performance

  Correct Answer: B

  Declaring a stock dividend will increase the number of shares outstanding and thereby keep the per share price low enough to be an attractive investment. Stock dividends may also show the company management's confidence in the present and future performance of the company.

• Question 1865:

  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.

  Correct Answer: B

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

• Question 1866:

  When analyzing the balance sheet, which of the following is an argument against using LIFO in times of rising prices?

  A. Neither of these answers is correct.

  B. Both of these answers are correct.

  C. Under LIFO, ending inventory will be overstated.

  D. Under LIFO, ending inventory is valued at the oldest prices, an unrealistic valuation.

  Correct Answer: D

  LIFO values ending inventory at the oldest prices, thus in times of rising prices, inventory will be understated. This results in reporting an unrealistic valuation of the company's inventory.

• Question 1867:

  At December 31, 1996, Davis Inc. awaits judgment on a lawsuit for a competitor's infringement of Davis' patent. Legal counsel believes it is probable that Davis will win the suit and indicated the most likely award together with a range of possible awards. How should the lawsuit be reported in Davis' 1996 financial statements?

  A. None of these answers.

  B. Neither in note disclosure nor by accrual.

  C. In note disclosure only.

  D. By accrual for the lowest amount of the range of possible awards.

  E. By accrual for the most likely award.

  Correct Answer: C

  A loss contingency is recognized but not a gain contingency following the principle of conservatism. A gain contingency is only disclosed in the notes until the settlement is realized.

• Question 1868:

  Items reported as prior-period adjustments

  A. do not include the effect of a mistake in the application of accounting principles as this is accounted for as a change in accounting principle rather than a prior-period adjustment.

  B. do not affect the presentation of prior-period comparative financial statements.

  C. are reflected as adjustments of the opening balance of the retained earnings of the earliest period presented.

  D. none of these answers.

  E. do not require further disclosure in the body of financial statements.

  Correct Answer: C

  Prior-period adjustments are made for the correction of errors. All the effects of errors on prior-period financial statements are reported as adjustments to beginning retained earnings for the earliest period presented in the retained earnings statement.

• Question 1869:

  Which of the following is/are true about computation of Basic EPS?

  I. Reacquired shares are excluded from the date of acquisition.

  II. Shares issued in the purchase of assets are assumed to have been outstanding for the entire period.

  III.

  Shares issued in mergers are assumed to have been outstanding from the date of issuance.

  A.

  I only

  B.

  II and III

  C.

  I and II

  D.

  I, II and III

  Correct Answer: A

  Weighted average shares used in EPS computations are calculated using the following rules:

  1.

  Reacquired shares are excluded from the date of acquisition.

  2.

  Shares issued in the purchase of assets are included from the date of issuance.

  3.

  Shares issued in mergers are assumed to have been outstanding for all periods for which EPS numbers are presented.

• Question 1870:

  When compared to the percentage-of-completion method, the completed contract method

  A. reports larger total assets.

  B. reports higher net assets.

  C. reports higher cash flows.

  D. reports income earlier.

  E. uses higher estimates of selling prices.

  Correct Answer: A

  The completed contract method reports larger total assets because it accumulates inventory.