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

• Question 1871:

  In the direct method statement of cash flows, the primary component of investing cash flow is typically

  A. dividend payments.

  B. long-term investments in securities.

  C. capital expenditures for long-term assets.

  D. repayment of debt.

  E. investments in affiliates.

  Correct Answer: C

  Capital expenditures for long-term assets such as plant and machinery are usually the primary component of investing cash flow.

• Question 1872:

  Under the accrual basis of accounting, which of the following statements is true?

  I. Reported net income provides a measure of operating performance.

  II. Revenue is recognized when cash is received, and expenses are recognized when payment is made.

  III.

  Cash inflows are recognized when they are received, and cash outflows are recognized when they are made.

  A.

  I only

  B.

  I, II and III

  C.

  III only

  D.

  I and III

  Correct Answer: D

• Question 1873:

  Valuation of PPandE and natural resources emphasizes all of the following accounting objectives except ________.

  A. accounting for monies invested in assets

  B. historical cost

  C. conservatism principle

  D. reality

  Correct Answer: D

  The financials portray historical information; they do not paint a picture of today.

• Question 1874:

  A firm has a net profit margin of 25%. Its total asset turnover equals 1.3 and equity turnover equals 2.1. The firm's ROE and financial leverage equal ________.

  A. 28.6%, 1.47

  B. 43.2%, 1.33

  C. 52.5%, 1.62

  D. 39.8%, 0.62

  Correct Answer: C

  ROE = net income/equity = (net income/sales)*(sales/equity) = net profit margin * equity turnover = 25% *2.1 = 52.5% Financial Leverage = Total assets/equity = (total assets/sales)*(sales/equity) = (1/asset turnover)*(equity turnover) = 2.1/1.3 = 1.62.

• Question 1875:

  In periods of rising prices, which inventory costing method results in the smallest income tax expense?

  A. Average cost

  B. Perpetual

  C. FIFO

  D. LIFO

  Correct Answer: D

  LIFO assigns the largest dollar value amounts to COGS when purchase prices are rising, thus resulting in lower net income and lower income taxes.

• Question 1876:

  Patterson Company has the following information of one of its vehicles purchased on January 1, 1992:

  Vehicle cost $50,000 Useful life, years, estimated 5 Useful life, miles, estimated 100,000 Salvage value, estimated $10,000

  Actual miles driven:

  1992 30,000 1993 10,000 1994 15,000 1995 25,000 1996 12,000

  No estimates were changed during the life of the asset. The 1994 depreciation expense using the sum-ofyears'-digits (SYD) method was ________.

  A. $13,333

  B. $8,000

  C. $10,667

  D. $10,000

  E. $6,000

  Correct Answer: B

  SYD depreciation is calculated on a constant depreciable base equal to $40,000 ($50,000 original cost 10,000 salvage value), multiplied by the SYD fraction. The denominator is the sum of the digits of the total years of the expected useful life (1+2+3+4+5=15). The SYD fraction's numerator equals the remaining years. For 1994, the fraction is 3/15, and depreciation expense is $8,000 ($40,000 X 3/15).

• Question 1877:

  A firm's financial data show:

  Taxable income 1,500 Taxes paid 500 Non-cash operating expenses 780 Bonds retired 700 Loss on retired bonds 140

  Then, the financing cash flow equals ________.

  A. -700

  B. -840

  C. 160

  D. -900

  Correct Answer: D

  The firm's tax rate equals 500/1,500 = 30%. Note that loss on bonds retired is an extraordinary item under US GAAP and presented after-tax. Hence, the total cash spent on retiring bonds = 700 + 140/(1-0.3) =

  900. So financing cash flow = - 900.

• Question 1878:

  Which of the following is/are FALSE?

  I. Interest expenses that are capitalized are charged against investing cash flows.

  II. Firms that expense interest costs incurred on debt must treat them as financing cash flows.

  III. Firms that expense costs show lower equity than comparable firms that capitalize the costs.

  IV.

  Capitalization of expenses leads to lower tax payments in the first year.

  A.

  I, II and IV

  B.

  II and IV

  C.

  II and III

  D.

  III and IV

  Correct Answer: B

  Interest expenses are treated as operating cash flows under US GAAP. Capitalization leads to higher net income since the entire expenses are not charged against it. Due to this, the tax deductions are lower in the first year, leading to higher taxes. The higher income leads to the capitalizing firm having a higher equity. The difference in equity reduces over time to zero.

• Question 1879:

  The deferred income tax account

  A. can be reported as an asset

  B. is reported as a liability if it has a credit balance

  C. is where the difference between income tax expense and income tax payable is reconciled

  D. all of these answers are correct

  Correct Answer: D

  The difference between income tax expense (based on accounting income) and the actual income taxes payable (based on taxable income) is reconciled in an account called deferred income taxes. It can be reported as an asset or a liability, depending on its balance and the circumstances.

• Question 1880:

  Costs that can be reasonably associated with specific revenues but not with specific products should be

  A. capitalized and then amortized over a period not to exceed 60 months.

  B. expensed in the period in which the related revenue is recognized.

  C. capitalized and then amortized over a period not to exceed 40 years.

  D. allocated to specific products based on the best estimate of the production processing time.

  E. charged to expense in the period incurred.

  Correct Answer: B

  The expense recognition principle of "associating cause and effect" or "matching" applies when a direct cause and effect relationship can be demonstrated between costs and particular revenues.