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

• Question 1911:

  How should the effect of a change in accounting estimate be accounted for?

  A. None of these answers.

  B. By reporting pro forma amounts for prior periods.

  C. In the period of change and future periods if the change affects both.

  D. By restating amounts reported in financial statements of prior periods.

  E. As prior-period adjustments to beginning retained earnings.

  Correct Answer: C

  The effect of a change in accounting estimate must be accounted for as a component of income from continuing operations in the period of change and in future periods.

• Question 1912:

  In a period of falling prices, the FIFO inventory method

  A. neither of these answers is correct

  B. both of these answers are correct

  C. magnifies the effects of the business cycle on income

  D. gives the lowest possible value for ending inventory

  Correct Answer: B

  The first-in-first-out (FIFO) method is based on the assumption that the costs of the first items acquired should be assigned to the first items sold, therefore ending inventory on hand is based on the most recent prices.

• Question 1913:

  An organization purchased a computer on January 1, 1996 for $108,000. It was estimated to have a 4year useful life and a salvage value of $18,000. The double-declining-balance method is to be used. The amount of depreciation to be reported for the year ending December 31, 1996 is ________.

  A. ($108,000 - 18,000) (25% X 2)

  B. ($108,000) (25% X 2)

  C. ($108,000 - 18,000) (25% X 1/2)

  D. ($108,000) (25%)

  E. ($108,000) (25% X 1/2)

  Correct Answer: B

  When using a declining-balance method, a constant rate is applied to the changing carrying value of the asset. The constant rate for the double-declining-balance method is twice the straight-line rate ((100% / 4 years) X 2)

• Question 1914:

  Which of the following is/are true about depreciation?

  I. Depreciation allocates non-cash expenses to period in which long-lived assets are used.

  II. Depreciation provides funds for the replacement of an asset.

  III.

  Depreciation charges arise due to an adherence to accrual method of accounting.

  A.

  I only

  B.

  III only

  C.

  I and III

  D.

  I, II and III

  Correct Answer: C

  Depreciation is the accounting device which facilitates a charging of the costs incurred in prior periods on assets that have been used for productive activities in the current period. Note that this is a non- cash expense since the cash left the firm's coffers at the time the asset was purchased (either in part or in full). Remember, however, that depreciation has cash flow consequences indirectly through its effect on taxes. Depreciation expense owes its existence to the accrual method of revenue recognition whichrequires that expenses be matched with the revenues generated. No depreciation charges would exist under Cash accounting, which would allocate expenses as and when cash was used to make payments on asset purchases. Clearly, depreciation does not provide funds for anything for it is an accounting entry.

• Question 1915:

  Calculate the book value per share of Quality, Inc.'s common stock, given the following information. Par value of common stock, $2.5 per share; total assets, $19,100,000; retained earnings, $7,375,000; total liabilities, $6,975,000; number of common shares outstanding, 1,250,000; number of preferred sharesoutstanding, 15,000 at $100 par value. Market value of common stock, $24.25. Market value of preferred stock, $106.50.

  A. $8.50

  B. $15.28

  C. $3.80

  D. $9.38

  E. None of these answers

  Correct Answer: A

  The book value of the firm's common stock is $8.50 which is calculated as follows: total assets of $19,100,000, minus total liabilities of $6,975,000, minus, preferred stock outstanding of $1,500,000 (15,000 X $100), divided by the number of common shares outstanding of 1,250,000.

• Question 1916:

  What is the primary function of the Securities and Exchange Commission as it relates to a company's financial statements?

  A. None of these answers.

  B. To function as the standard-setting body of the accounting profession.

  C. To provide the investment public with completely independent and unbiased advice regarding the purchase of good quality public securities.

  D. To ensure that a public company makes full and accurate disclosure of all pertinent information relating to a company's business.

  Correct Answer: D

  To ensure that a public company makes full and accurate disclosure in the company's registration statement of all pertinent information relating to a company's business, its securities, its financial position and earnings, and the underwriting arrangements.

• Question 1917:

  Minority interest on the consolidated balance sheet is listed ________.

  A. none of these answers

  B. as a liability

  C. between liabilities and shareholders' equity

  D. as a component of shareholders' equity

  E. as an asset

  Correct Answer: C

  Minority interest represents the proportionate stake of minority shareholders in a company's majority-owned subsidiary that is consolidated. Minority interest is neither a liability nor equity but it is a financing component and, therefore, is presented between liabilities and shareholders' equity.

• Question 1918:

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

  A. None of these answers

  B. FIFO

  C. LIFO

  D. Average cost

  Correct Answer: B

  When prices are rising, FIFO will produce the highest profit because the first in (lowest cost) inventory is the first out. This leaves the most recently purchased inventory on hand and since it has the highest cost, ending inventory will have the greatest value which means that cost of goods sold will be the lowest and profits will be the highest (ending inventory = beginning inventory + net purchases - cost of goods sold).

• Question 1919:

  Sparten, Inc., a plumbing contractor, received a check for $3,000 on June 30 for services to be performed in the following fiscal month. During the July accounting period, Sparten completed all but $500 of the job. What adjusting entry needs to be made at the end of July?

  A. increase Cash and Revenue for $3,000

  B. decrease Accounts Receivable and increase Revenue for $2,500

  C. increase Unearned Revenue and decrease Cash for $500

  D. debit Unearned Revenue and credit Revenue for $2,500

  Correct Answer: D

  When the check was received on June 30, a liability was established for $3,000 because revenue could not be recognized until it was earned. During July, $2,500 of revenue was earned and should be recognized, along with a reduction (debit) to the Unearned Revenue account.

• Question 1920:

  Extraordinary items are placed on the income statement:

  A. after net income from continuing operations and net of tax.

  B. as a footnote to the statement as they are 1 time items and are not a part of the normal course of business for a corporation.

  C. within income from operations net of tax.

  D. after net income from continuing operations and before taxes.

  Correct Answer: A

  Extraordinary items are always included net of tax after the net income from continuing operations. These items are unusual items for the company and occur infrequently.