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

• Question 1891:

  When purchased, plant assets are recorded at:

  A. cost

  B. market value

  C. future value

  D. lower of cost or market

  Correct Answer: A

  Fixed assets are recorded at cost, which includes all normal and reasonable expenditures necessary to get the asset in place and ready to use.

• Question 1892:

  If an independent auditor has not become satisfied by means of other auditing procedures with respect to opening inventories, they should

  A. either disclaim an opinion on the statement of income or qualify the opinion thereon, regardless of the degree of materiality of the amounts involved.

  B. either disclaim an opinion on the statement of income or qualify the opinion thereon, depending on the degree of materiality of the amounts involved.

  C. disclaim an opinion or qualify the opinion on the statements as a whole.

  D. express an adverse opinion on the statements taken as a whole when the amount in question is material.

  Correct Answer: B

  If the auditor has become satisfied as to current inventory, the auditor may use alternative procedures to become satisfied as to opening inventories. But if they cannot become satisfied regarding inventories, a qualified opinion or a disclaimer of opinion may be expressed, depending on materiality. Because cost of goods sold is dependent on opening inventories, an unqualified opinion on the income statement is not possible.

• Question 1893:

  Excerpts from the balance sheet of Milton Corporation as of April 30, 1997 are presented as follows:

  Cash $725,000 Accounts receivable (net) $1,640,000 Inventories $2,945,000 Total current assets $5,310,000 Accounts payable $1,236,000 Accrued liabilities $831,000 Total current liabilities $2,067,000

  The board of directors of Milton met on May 5, 1997 and declared a quarterly cash dividend in the amount of $200,000 ($0.50 per share). The dividend was paid on May 28, 1997 to shareholders of record as of May 15, 1997.

  Assume that the only transactions that affected Milton during May 1997 were the dividend transactions. If the dividend declared by Milton had been a 10% stock dividend instead of a cash dividend, Milton's total shareholders' equity would have been

  A. unchanged by either the dividend declaration or the dividend distribution.

  B. increased by the dividend declaration and unchanged by the dividend distribution.

  C. decreased by the dividend declaration and increased by the dividend distribution.

  D. unchanged by the dividend declaration and decreased by the dividend distribution.

  E. increased by the dividend declaration and decreased by the dividend distribution.

  Correct Answer: A

  The declaration and distribution of a stock dividend involves transferring an amount from retained earnings to common stock. However, the total shareholders' equity remains the same.

• Question 1894:

  Profit margin is a ratio that:

  A. shows the return on net sales

  B. is calculated as net sales divided by operating expenses

  C. yields the company's financial position at a point in time

  D. compares total assets to net sales

  Correct Answer: A

  Profit margin, also called return on net sales, is calculated by dividing net income by net sales. This ratio measures the average portion of each dollar of revenue that ends up as profit.

• Question 1895:

  Tracy company reports the following in its statement of cash flows:

  Net Income $1,000 Depreciation and Amortization 350 Decrease (Increase) in Accounts receivable (10) Decrease (increase) in inventory 200 Decrease (increase) in prepaid expenses 80 Increase (decrease) in trade payables (300) Increase (decrease) in taxes payable 75 Cash Flow from operations 1,395

  If Tracy shows depreciation expense of $275 in its income statement, cash paid for amortization is ________.

  A. $75

  B. $525

  C. not determinable

  D. $0

  Correct Answer: D

  No cash outflow.

• Question 1896:

  The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.

  Net Income $50,000 Provision for bad debts $2,000 Increase in Inventory $1,000 Increase in accounts payable $2,000 Purchase of new equipment $15,000 Sale of equipment for $10,000 gain $20,000 Depreciation expense $5,000 Repurchase of common stock $10,000 Payment of dividend $4,000 Interest payment $3,000

  What is change in cash?

  A. $39,000

  B. $45,000

  C. $46,000

  D. $49,000

  Correct Answer: A

  $50,000 + (-$1,000 + $2,000 - $15,000 + $20,000 - $10,000 - $4,000 - $3,000)

• Question 1897:

  The peaks and valleys of the business cycle tend to be smoothed out using which inventory method?

  A. weighted average

  B. LIFO

  C. gross profit method

  D. FIFO

  Correct Answer: B

  When prices are moving either upward or downward, the cost of goods sold (under LIFO) will show costs closer to the price level at the time the goods were sold. Therefore the LIFO method tends to show a smaller net income during inflationary times and a larger net income during deflationary times than other methods of inventory valuation.

• Question 1898:

  Which of the following items is deducted from net income to arrive at cash flow from operations when using the indirect method?

  A. depreciation expense

  B. decrease in accounts receivable

  C. decrease in accounts payable

  D. amortization expense

  Correct Answer: C

  A decrease in accounts payable is an outflow.

• Question 1899:

  Realized gains and losses from sales of assets are measured as

  A. fair value of asset less net book value of asset.

  B. sales price of asset less net book value of asset.

  C. net book value less fair value of asset.

  D. sales price of asset less fair value of asset.

  Correct Answer: B

• Question 1900:

  A firm has total assets of 5,320, net sales of 8,395, average receivables of 894, current assets of 2,393 and a current ratio of 1.2. Its average receivables collection period equals ________.

  A. 41.73 days

  B. 29.92 days

  C. 23.19 days

  D. 38.87 days

  Correct Answer: D

  This is measured by two ratios in slightly different ways:

  a.

  Receivables turnover ratio = Net annual sales/average receivables

  b.

  Average receivables collection period = 365/receivables turnover

  In this case, receivables turnover = 8,395/894 = 9.39. Therefore, average receivables collection period = 365/9.39 = 38.87 days. Notice that the collection period is measured in "days."