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

• Question 1941:

  MacDonald Inc. reported net income of $300,000 for 1996. Changes occurred in several balance sheet accounts as follows:

  Equipment $25,000 increase Accumulated depreciation 40,000 increase Note payable 30,000 increase

  Additional information:

  During 1996, MacDonald sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.

  In December 1996, MacDonald purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.

  Depreciation expense for the year was $52,000.

  In MacDonald's 1996 statement of cash flows, net cash used in investing activities is ________.

  A. $12,000

  B. $18,000

  C. $20,000

  D. $32,000

  E. $2,000

  Correct Answer: E

  The purchase and sale of equipment are investing activities. The firm spent $20,000 cash to buy equipment and received $18,000 cash (net book value was $13,000 plus $5,000 gain) by selling its old equipment. Therefore, the net cash used in investing is $2,000. The issuance of a note payable is part of the acquisition price of equipment and is classified as a noncash financing and investing activity.

• Question 1942:

  In the successful effort method, oil firms:

  I. are required to expense all oil-drilling costs resulting in dry holes.

  II. can capitalize drilling costs which result in productive oil wells.

  III. are required to capitalize all oil-drilling costs.

  IV.

  are required to expense all oil-drilling costs.

  A.

  I only to expense all oil-drilling costs.

  B.

  I and II

  C.

  III and IV

  D.

  II only

  Correct Answer: B

  In extractive industries, firms are allowed to use either the full-cost method, in which all search and development costs can be capitalized, or the successful-efforts method, where all such costs are expensed unless they result in revenue- generating assets, in which case, they are capitalized. If an oil drilling firm uses the successful-efforts method, it expenses costs incurred on dry holes and capitalizes those resulting in oil-producing wells.

• Question 1943:

  A piece of equipment costs $200,000, has a useful life of 5 years and an estimated salvage value of $50,000. How much depreciation expense should the company recognize in year 4 if it is using the sum-ofthe- years' digits method of depreciation?

  A. $30,000

  B. $80,000

  C. $26,666.67

  D. $20,000

  Correct Answer: D

  Using the sum-of-the-years' digits the sum of the years is 15. In year 4 you would take 2/15 of the cost less the salvage value. 2/15 of $150,000 is equal to $20,000.

• Question 1944:

  Which of the following correctly defines an element directly related to measuring the performance and status of a business entity?

  A. Gains are increases in equity from transactions and other events and circumstances that result from revenues or investments by owners.

  B. Equity is a residual interest.

  C. Investments by owners are limited to receipts of assets and satisfaction or conversion of liabilities.

  D. Revenues are inflows from peripheral or incidental transactions as well as the entity's ongoing major operations.

  E. None of these answers.

  Correct Answer: B

  Equity in a business is considered a residual interest and represents the ownership (total assets minus total liabilities) in the firm.

• Question 1945:

  Deferred taxes would be classified as

  A. a long-term borrowing.

  B. a current liability.

  C. a current asset.

  D. a prepaid expense.

  E. stockholders' equity.

  Correct Answer: C

  Deferred income taxes represent deferred tax assets.

• Question 1946:

  A firm issued 2 million warrants with an exercise price of 102 on June 15, 1996. The maximum price of the stock in 1996 was 129, the average price was 110. The stock closed out the year at 99. How many additional shares must be used in the computation of Diluted EPS as a result of these warrants?

  A. 111,782

  B. 145,454

  C. 78,788

  D. zero

  Correct Answer: C

  The conversion assumptions for options and warrants are as follows:

  1.

  They are assumed to be exercised at the beginning of the period or at the time of issuance, whichever is later.

  2.

  They enter into the Diluted EPS calculations only if the average stock price during the period exceeds the exercise price. With the Treasury stock method, the total shares repurchased using exercise proceeds = 2*102/110 = 1,854,546. Thus, additional shares issued = 2 million - 1,854,546 = 145,454. These are outstanding for 6.5 months. Therefore, additional weighted shares = 145,454*6.5/12 = 78,788.

• Question 1947:

  Which of the following conditions would allow a firm to classify a short-term liability as a long-term debt?

  I. The firm has issued a long-term note with the stated purpose of extinguishing the short-term debt when it matures. The note is cancelable if there are violations of certain operating provisions.

  II. The firm has entered into a binding agreement with a bank to refinance the short-term debt with a longterm liability.

  III.

  The firm has announced that it will continue to refinance the debt with available credit for the next 2 years.

  A.

  III only

  B.

  I and III

  C.

  II only

  D.

  II and III

  Correct Answer: C

  If these agreements have any provisions for cancellation which are either ambiguous or which have a good probability of being violated, then the short-term debt cannot be classified as a long-term debt. That's why

  (I) is not a valid choice. (III) is not acceptable since there is no demonstration of credible intent or ability to be able to refinance the debt.

• Question 1948:

  At the end of a fiscal period, any revenue that has been earned but not received should be credited to an appropriate

  A. revenue account

  B. asset account

  C. liability account

  D. expense account

  Correct Answer: A

  Revenue should be recognized in the period in which it is earned and is credited to the appropriate revenue account.

• Question 1949:

  Current liabilities are defined as those that come due:

  A. within a year.

  B. the shorter of "within an operating cycle" or "within a year."

  C. within an operating cycle.

  D. the longer of "within an operating cycle" or "within a year."

  Correct Answer: D

  The classification of liabilities into short and long-term is somewhat subjective but for balance-sheet purposes, all obligations that are coming due within a year or an operating cycle, whichever is longer, are considered to be current

• Question 1950:

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

  A. a closing entry

  B. an opening entry

  C. an adjusting entry

  D. a reversing 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.