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

• Question 1931:

  A firm using LIFO accounting has a LIFO reserve of 900, with a LIFO ending inventory of 8,100. It is

  currently in the 40% tax bracket. If it switches to FIFO accounting, which of the following is true?

  I. Its ending FIFO inventory equals 7,200

  II. Its deferred taxes decrease by 360

  III.

  Its equity increases by 540

  A.

  III only

  B.

  I and III

  C.

  II and III

  D.

  I, II and III

  Correct Answer: A

  LIFO Reserve = FIFO Ending inventory value - LIFO Ending inventory value Therefore, the ending inventory under FIFO = 8,100 + 900 = 9,000. The deferred taxes increase by 900*0.4 = 360 and the equity increases by 900*(1-0.4) = 540.

• Question 1932:

  Which of the following would be classified a cash inflow from investing activities?

  A. Proceeds from collecting the principal amount of loans.

  B. Proceeds from selling investments in the equity securities of other companies.

  C. All of these answers are correct.

  D. Proceeds from selling investments in the debt securities of other entities, except cash equivalents.

  Correct Answer: C

  All responses qualify as cash inflows from investing activities.

• Question 1933:

  Under an inflationary, LIFO environment with stable inventories, which of the following is true compared to FIFO?

  Working Capital Taxes Current Ratio

  I. Higher Lower Lower

  II. Lower Lower Lower

  III. Higher Lower Lower

  IV.

  Lower Higher Higher

  A.

  II

  B.

  I

  C.

  IV

  D.

  III

  Correct Answer: A

  With rising prices and stable inventories, the COGS is higher under LIFO than under FIFO, thus lower net income and lower taxes. Ending inventory is valued lower under LIFO than under FIFO and hence, a lower current asset value and lower working capital and current ratio.

• Question 1934:

  Which of the following is/are true about held-to-maturity securities?

  I. They are mostly non-current assets.

  II. They are reported at fair market value.

  III.

  Income on these securities is included in operating income.

  A.

  II only

  B.

  II and III

  C.

  I and III

  D.

  I, II and III

  Correct Answer: C

  Marketable securities classified as "Held-to-maturity" are financial securities purchased with the intent (and ability) to hold until maturity. They are therefore categorized as non-current assets in all periods except the one in which they are about to mature. They are reported on the balance sheet at theamortized historical cost and income on the securities, including amortization of premium or discount, is part of the operating income.

• Question 1935:

  A test to determine whether a convertible security is dilutive or antidilutive is to calculate EPS

  A. for the security alone and compare it to the EPS without inclusion of the security.

  B. for the security alone and compare it to the EPS with inclusion of the security.

  C. for the security alone.

  D. without inclusion of the security.

  E. with inclusion of the security.

  Correct Answer: A

  By comparing the EPS of the security alone with the EPS without inclusion of the security, if the former is smaller than the latter, then the security is dilutive which means it causes EPS to decline.

• Question 1936:

  At the end of an accounting period, each expense that has been incurred but not yet paid should be recorded as

  A. a reversing entry

  B. an opening entry

  C. an adjusting entry

  D. a closing entry

  Correct Answer: C

  Expenses should be recognized in the period in which they are incurred. In order to be consistent with the matching principle, an adjusting entry must be made to record the expense, regardless of whether it has been paid.

• Question 1937:

  The purpose of the Management Report is to:

  I. analyze favorable and unfavorable trends affecting the firm.

  II. reinforce senior management's responsibilities for the company's financial and internal control systems.

  III. review the firm's financial condition in light of short-term liquidity requirements and proposed investment activities.

  IV.

  emphasize the roles of management, directors and auditors in the preparation of financial statements.

  A.

  I, II and III

  B.

  II and III

  C.

  II, III and IV

  D.

  II and IV

  Correct Answer: D

  I and III are part of Management's Discussion and Analysis (MDandA)

• Question 1938:

  The Statement of Stockholders' Equity does not report

  A. any minimum pension liability.

  B. any cumulative impact on prior period earnings.

  C. the investment of the owners in the firm.

  D. the various accounting adjustments that reflect selected market value changes in noncurrent assets.

  E. the effect of exchange rate changes on certain foreign subsidiaries.

  Correct Answer: B

  Any cumulative impact on prior period earnings is reported net of tax after extraordinary items and discontinued operations on the income statement.

• Question 1939:

  "Horizontal analysis" refers to:

  A. comparison of various quantities in a common-sized financial statement.

  B. comparison of a firm's financial statements with those of a similar firm.

  C. comparative analysis of financial statements as they evolve over time.

  D. comparative study of a firm's dependencies on businesses in the different industries in which it is active.

  Correct Answer: C

  In comparative financial analysis, one of the important parts is detecting trends in the changes that occur over time in the different financial statements. This trend analysis is quirkily referred to as "horizontal analysis," probably because comparison implies a side-by-side analysis of the financial items in the statements. Two popular techniques in horizontal analysis are "year-to-year change" analysis and "Index number trend series" analysis.

• Question 1940:

  Which of the following is NOT a disclosure requirement for financial instruments?

  A. Firms must present fair valuations of financial instruments in the financial statements or accompanying notes.

  B. Firm must present reasons for not meeting any of the disclosure requirements.

  C. Firms must disclose the purposes of holding any speculative financial instruments.

  D. Firms must disclose significant assumptions used to value financial instruments.

  Correct Answer: C

  Firms must disclose the purposes of holding any speculative financial instruments.