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

• Question 1951:

  The following information is from the financial statements of Complex Capitalists for 1997 and 1998:

  Dec. 31, 1997 - 1 million common shares outstanding, capital structure all-equity

  March 31, 1998 - issued 200,000 common shares.

  May 31, 1998 - issued 800,000 warrants exercisable at a strike of 35.

  The average price during 1998 was 34 and the maximum price was 39.

  Given the above example, the Diluted EPS will use how many shares?

  A. 1.2 million

  B. 2.0 million

  C. 1.617 million

  D. 1.15 million

  Correct Answer: D

  Options and warrants enter into the Diluted EPS calculations only if the average stock price during the period exceeds the exercise price. In this case, since the average price is less than the strike price, the warrants are anti-dilutive and ignored in the calculation of Diluted EPS. Hence, weighted number of shares used = 1 million + 9/12*200,000 = 1.15 million.

• Question 1952:

  Use the following financial data on Enterprise:

  a.

  Sale of equipment $32,000

  b.

  Loss on equipment sale $9,000

  c.

  Dividends paid $12,500

  d.

  Purchase of an office suite $104,000

  e.

  Common stock repurchase $45,000

  f.

  Dividends received from investments $8,500

  g.

  Interest received on Treasury bonds $1,200

  h.

  Supplier accounts paid $3,700

  i.

  Cash collection from customers $14,200

  j.

  Ending cash balance $98,000 $198,300

  In the above question, the beginning cash balance of the firm was ________.:

  A. $216,300

  B. .$207,300

  C. C$198,300

  D. $109,300

  Correct Answer: B

  Note that the loss on equipment is a non-cash event. Using the direct method, beginning cash balance + net cash inflow = ending cash balance Hence, beginning balance = 98,000 - (32,000 -12,500 -104,000 45,000 + 8,500 +1,200 - 3,700 + 14,200) = $207,300.

• Question 1953:

  The Income Summary account is

  A. a permanent account

  B. an asset

  C. a temporary account

  D. a liability

  Correct Answer: C

  The Income Summary account is a temporary account created especially for the closing process and is used only for flowing adjustments and closing entries through.

• Question 1954:

  The accumulated amount by which a plant asset has been depreciated over its useful life is classified as

  A. a liability

  B. an asset

  C. an expense

  D. revenue

  Correct Answer: B

  Accumulated Depreciation reports the total amount of depreciation expense recognized in all prior periods since the asset(s) were put into service.

• Question 1955:

  Under accrual accounting, which of the following is/are Incorrect?

  I. Revenues are recognized when cash is received.

  II. The reported income is a good indicator of the firm's current performance.

  III. Expenses do not always involve cash flows.

  IV.

  Revenues and the related costs are matched in the same period.

  A.

  I only

  B.

  II and III

  C.

  III only

  D.

  All of these answers are correct

  Correct Answer: A

  Under accrual accounting, revenues are recognized when the earnings process behind the revenues is complete and expenses are recognized in the period the goods and services are used for generating income. Therefore, revenues and expenses do not always involve actual cash flows, though revenues and costs that are related do get matched in the same period whenever such an identification is possible.

• Question 1956:

  Restricted cash balances are ________.

  A. non-current assets

  B. not considered assets

  C. none of these answers

  D. regarded as part of long-term equity

  Correct Answer: A

  At times, firms earmark cash deposits and balances for meeting longer term obligations like sinking funds or plant expansions. Such restricted cash balances are reported as non-current assets even though they are in a liquid form, since they are not available to satisfy current liabilities.

• Question 1957:

  Which of the following is/are true?

  I. Straight preferred equity holders to do not have a right to demand redemption.

  II. Dividend payments on preferred equity are cumulative.

  III. Dividends on common stock cannot be paid unless preferred dividends are paid.

  IV.

  Preferred dividends which are in arrears are a non-recorded liability.

  A.

  I and IV

  B.

  I, II, III and IV

  C.

  I, II and III

  D.

  II, III and IV

  Correct Answer: B

  Preferred equity is usually not redeemable, implying that preferred equity holders do not have a right to demand from the company a retirement of their equity through redemption payment. Preferred dividends that are not paid when due remain a liability, though they are not recorded as such. This leads to an understatement of liabilities since someday, these dividends must definitely be paid. In particular, the dividends in arrears are cumulative and must be paid in full before any ordinary dividends can be paid to common stockholders.

• Question 1958:

  Gamma-Theta is a financial software firm with gross sales of 176,000 last year. Its cost of goods sold equaled 25,685. Gamma-Theta's corporate tax rate is 35%. If its net income after taxes was 70,279, its operating expenses were ________.

  A. 31,889

  B. 42,193

  C. 29,495

  D. 51,722

  Correct Answer: B

  Gamma-Theta's pre-tax income equals 70,279/0.65 = 108,122. Now, pre-tax income = gross sales - cost of goods sold - operating expenses. Therefore, 108,122 = 176,000 - 25,685 - operating expenses. This gives operating expenses = 42,193.

• Question 1959:

  From tax perspective, which of the following depreciation methods is usually the best?

  A. Double declining

  B. Modified accelerated

  C. Straight line

  D. Sum-of-digits

  Correct Answer: A

  Since Double Declining results in the biggest depreciation expense of the four in the initial years, it allows the biggest deferral of tax payments. These deferrals can sometimes be for an indefinite period, thus avoiding them almost altogether.

• Question 1960:

  When purchased, plant assets are recorded at ________.

  A. future value

  B. market value

  C. lower of cost or market

  D. cost

  Correct Answer: D

  Fixed assets are recorded at cost, which includes all normal and reasonable expenditures necessary to get the asset in place and ready to use.