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

• Question 1921:

  Which of the following would not be reported as an extraordinary item?

  A. gain or loss on sale of fixed assets

  B. gain or loss from passing of a new law

  C. gain or loss from early retirement of debt

  D. uninsured loss from a flood

  Correct Answer: A

  An item must be both unusual and infrequent (and material in amount) to be classified as extraordinary.

• Question 1922:

  Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are

  correct.

  Cash from operating activities $60,000

  Net Income (4,000)

  Depreciation (2,000)

  Increase in accounts receivable (1,000)

  Increase in deferred tax liability $53,000

  Cash from investing activities ($48,000)

  Purchase of marketable securities 2,500

  Dividends received 1,500

  Dividends paid ($44,000)

  Cash from financing activities (500)

  Increase in Short-term debt (2,500)

  Increase in Long-term debt ($3,000)

  Increase in cash $6,000

  The correct cash flows from operating activities is ________.

  A. $65,500

  B. $63,500

  C. $53,500

  D. None of these answers

  Correct Answer: A

  60,000 + 4000(depreciation) - 2,000 (receivables) + 1,000 (deferred taxes) +2,500 (dividends received)

• Question 1923:

  In January 1996, Weber Co. purchased a mineral mine for $2,640,000 with removable ore estimated at 1,200,000 tons. After it has extracted all the ore, Weber will be required by law to restore the land to its original condition at an estimated cost of $180,000. Weber believes it will be able to sell the property afterwards for $300,000. During 1996, Weber incurred $360,000 of development costs preparing the mine for production and removed and sold 60,000 tons of ore. In its 1996 income statement, what amount should Weber report as depletion?

  A. $150,000

  B. $132,000

  C. $135,000

  D. $159,000

  E. $144,000

  Correct Answer: E

  The depletion base is the purchase price of the land ($2,640,000), minus the value of the land after restoration $120,000 ($300,000 -180,000), plus any costs necessary to prepare the property for the extraction of ore ($360,000). The depletion charge is $2.40 per ton ($2,640,000 -120,000 + 360,000) / 1,200,000 tons). Therefore, the firm should report $144,000 ($2.40 X 60,000 tons) as 1996 depletion expense.

• Question 1924:

  If a firm's profit margin increases by 8%, the debt-to-equity ratio increases from 35% to 55% and its asset turnover falls by 20%, the effect on its ROE is ________.

  A. +1.3%

  B. +0.24%

  C. -0.8%

  D. +1.6%

  Correct Answer: C

  ROE = net income/equity = (net income/sales)*(sales/assets)*(assets/equity) = (profit margin)*(asset turnover)*(1+debt/equity) The original assets/equity = 1 + 0.35 = 1.35 and the changed assets/equity =

  1.55. Therefore, the change in ROE equals (1+8%)*(1-20%)*1.55/1.35 = 0.992. Thus, ROE falls by 0.8%.

• Question 1925:

  Which of the following is/are true under accrual accounting?

  I. Expenses are recognized as services are used.

  II. Revenues are recognized when service is performed.

  III.

  Cash outflows determine expense recognition.

  A.

  II and III

  B.

  I and II

  C.

  I and III

  D.

  I, II and III

  Correct Answer: B

  With accrual accounting expenses are recognized when they are incurred, not when the cash is disbursed.

• Question 1926:

  Long-term obligations that are or will become callable by the creditor because of the debtor's violation of a provision of the debt agreement at the balance sheet date should be classified as

  A. current liabilities unless the creditor has waived the right to demand repayment for more than 1 year from the balance sheet date.

  B. current liabilities unless it is reasonably possible that the violation will be corrected within the grace period.

  C. contingent liabilities until the violation is corrected.

  D. none of these answers.

  E. long-term liabilities

  Correct Answer: A

  Current liabilities include obligations that must be liquidated within 1 year as well as obligations that are or will be callable by the creditor within 1 year because of a violation of a debt covenant. An exception exists, however, if the creditor has waived or subsequently lost the right to demand repayment for more than 1 year from the balance sheet date.

• Question 1927:

  Why do the corporation's directors declare stock dividends?

  A. to increase the market value of the company's stock

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

  C. to decrease the number of shares outstanding

  D. none of these answers is correct

  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 1928:

  Which of the following is the proper method of reporting the value of financial instruments on a firm's balance sheet?

  A. All of these answers

  B. Higher of cost or market

  C. None of these answers

  D. Cost

  E. Fair market value

  Correct Answer: D

  Company's are required by accounting regulations to record and report the value of financial instruments such as derivatives at cost.

• Question 1929:

  A financial auditor's report is required to:

  I. make sure that no fraudulent activity is occurring with the accounting systems.

  II. provide reasonable assurance that there are no material errors in the statements.

  III. attest to the fact that the auditor has performed adequate testing on the company's accounting system to ensure that the financial reporting is accurate.

  IV.

  state an opinion about the controls and checks present in the firm's reporting procedures.

  A.

  I and IV

  B.

  I, III and IV

  C.

  I, II and III

  D.

  II and III

  Correct Answer: D

  IV is usually reported to management but not in the audit report. Also, a financial auditor, would, in the course of her audit, check for material misstatements but is not responsible for unearthing fraudulent activities.

• Question 1930:

  Accounting Standards are best described as

  A. the state-of-the-art presentation of the science of accounting.

  B. presentation standards mandated by the Securities and Exchange Commission.

  C. the result of a political process among groups with diverse interests.

  D. measuring the quality of stewardship.

  Correct Answer: C

  Accounting standards have been through a long development process and are subject to continual innovation, modification, and change. Currently, the Financial Accounting Standards Board (FASB), composed of seven full-time paid members, functions as the standard-setting body of the accounting profession.