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

• Question 1901:

  Calculating COGS under a periodic inventory system relies on which of the following?

  A. a physical count of the ending inventory

  B. an analysis of the inventory value of each sale

  C. both of these answers are correct

  D. neither of these answers is correct

  Correct Answer: A

  Under the periodic inventory system, only the ending inventory is counted and priced. Cost of goods sold is determined by deducting the cost of the ending inventory from the cost of goods available for sale.

• Question 1902:

  When prices are rising, which of the following inventory valuation methods produces a higher ending inventory value?

  A. LIFO

  B. FIFO

  C. None of these answers

  D. Average cost

  Correct Answer: B

  When prices are rising, FIFO will produce the highest ending inventory value because the first in (lowest cost) inventory is the first out. This leaves the most recently purchased inventory on hand and since it was purchased at higher prices, it has the highest cost and ending inventory will have the greatest value.

• Question 1903:

  Which of the following is/are true?

  I. Assets = Equity + Liabilities

  II. Equity = Retained earnings + Dividends Payable

  III. Assets + Liabilities = Equity

  IV.

  Assets = Liabilities - Equity

  A.

  II and IV

  B.

  I only

  C.

  I and II

  D.

  III only

  Correct Answer: B

  The basic accounting equation states that Assets = Liabilities + Owners' Equity.

• Question 1904:

  Which of the following would have an effect on cash flow from operations?

  I. Sale of machinery for $50,000 with a net book value of $35,000.

  II. Purchase of supplies on credit.

  III. Remittance by customer in payment of goods purchased last accounting period.

  IV.

  Lease payment on machinery, which is accounted for as a capital lease.

  A.

  I, II and III

  B.

  I, III and IV

  C.

  III and IV

  D.

  I and III

  Correct Answer: C

• Question 1905:

  Which of the following is/are true about liquidity ratios, all else equal?

  I. The cash ratio increases as average receivables increase.

  II. The quick ratio is a more conservative liquidity ratio than the current ratio.

  III.

  Liquidity ratios decrease as total liabilities decrease.

  A.

  III only

  B.

  II only

  C.

  I, II and III

  D.

  I and III

  Correct Answer: B

  Receivables are not part of the cash ratio and hence, changes in receivables do not directly affect the cash

  ratio. The quick ratio does consider receivables in addition to cash and marketable securities but ignores

  all other current assets.

  Thus, it is more conservative than the current ratio.

• Question 1906:

  Which of the following is/are true about stock dividends?

  I. stock dividends lead to a decrease in the retained earnings account.

  II. large stock dividends are valued at their par value.

  III.

  small stock dividends are valued at their fair market value at the time of issuance.

  A.

  II and III

  B.

  I and III

  C.

  I, II and III

  D.

  I only

  Correct Answer: C

  Stock dividends are given to move retained earnings into capital accounts and hence represent a permanent capitalization of earnings. In that sense, stock dividends do not have any economic significance but are an accounting bookkeeping device. The recapitalization does have legal implicationsfor future distributions since the retained earnings account is the primary source of cash dividends and other accounts are more difficult to dip into for distributions. If the stock dividend is less than 20-25%, the additional stocks are valued at fair market value on the declaration date and the resultant amount moved from retained earnings account to the "par-value" account and the "additional paid-in capital" account. Larger stock dividends are valued at par.

• Question 1907:

  Which of the following is/are true about trading securities?

  I. They are current assets.

  II. They are reported at fair market value.

  III.

  Changes in their reported value are allocated directly to retained earnings.

  A.

  I only

  B.

  II and III

  C.

  I, II and III

  D.

  I and II

  Correct Answer: D

  Marketable securities classified as "Trading securities" are financial securities purchased with the intent to sell in the near future. They are therefore categorized as current assets and reported at the fair market value on the date of the balance sheet. When the classification of a trading security is changed, the assignation of the security to the new account is carried out at the fair market value on the transfer date, with any gain or loss reflected separately on the income statement.

• Question 1908:

  Where is Unearned Revenue reported in the financial statements?

  A. liability section of the balance sheet

  B. revenue section of the income statement

  C. asset section of the balance sheet

  D. operating expense section of the income statement

  Correct Answer: A

  Unearned revenue represents "services owed" and is reported in the liability section of the balance sheet.

• Question 1909:

  Under a periodic inventory system, how is COGS determined?

  A. Ending inventory is counted and subtracted from beginning inventory.

  B. Cost of goods sold is accumulated as sales are made.

  C. None of these answers is correct.

  D. The cost of ending inventory is subtracted from costs of goods available for sale.

  Correct Answer: D

  Under the periodic inventory system, only the ending inventory is counted and priced. Cost of goods sold is determined by deducting the cost of the ending inventory from the cost of goods available for sale.

• Question 1910:

  The portion of the insurance premiums that has expired during the fiscal period is classified as

  A. an increase in retained earnings

  B. an asset

  C. an expense

  D. a liability

  Correct Answer: C

  In accordance with the matching rule, the amount of an insurance policy that has expired during the accounting period must be recorded and classified as an expense for the period.