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

• Question 1961:

  Morgan Inc. was organized on January 2, 1997 with the following capital structure:

  10% cumulative preferred stock, par value $100 and liquidation value $105; authorized, issued and outstanding 1,000 shares, $100,000

  Common stock, par value $25; authorized 100,000 shares; Issued and outstanding 10,000 shares, $250,000

  Morgan had net income of $450,000 for its first year, but no dividends were declared. How much was Morgan's book value per common share at December 31, 1997?

  A. $68.50

  B. $70

  C. $25

  D. $45.00

  E. $69.50

  Correct Answer: A

  The book value per share of cumulative preferred stock is its liquidation value plus any dividends in arrears. Thus, the book value per preferred share is the $105 liquidation value plus $10 ($100 X 10%) of dividends in arrears, or $115. The total book value for preferred shares is $115,000 ($115 X 1000). The total book value of the company is $800,000 ($100,000 par value of preferred stock + $250,000 par value of common stock + retained earnings equal to $450,000 of net income). Hence, $685,000 ($800,000115,000) is the book value of the common stock, and book value per common share is $68.50 ($685,000 / 10,000 shares).

  Exam K

• Question 1962:

  An end-of-period adjustment for depreciation of fixed assets involves an entry to an expense and

  A. the increase of a contra account

  B. the decrease of a contra account

  C. the reduction of a liability

  D. the increase of a liability

  Correct Answer: A

  An adjustment for depreciation expense matches expenses with revenues for the period. An expense is incurred and the asset is reduced by increasing the contra account.

• Question 1963:

  If the net cash inflow = $12,000, Investing cash flow = $(4,000) and operating cash flow = $7,000, the financing cash flow equals ________.

  A. $9,000

  B. $23,000

  C. $15,000

  D. $12,000

  Correct Answer: A

  financing cash flow = 12,000 - (-4,000) - 7,000 = $9,000

• Question 1964:

  Firm A uses Double Declining and Firm B uses Sum-of-digits method of depreciation. In the first year, which of the following is/are TRUE?

  I. A shows lower assets than B

  II. A shows higher retained earnings than B

  III. A shows a higher debt-to-equity ratio than B

  IV.

  A shows a lower debt-to-asset ratio

  A.

  II and IV

  B.

  I and III

  C.

  I, III and IV

  D.

  II, III and IV

  Correct Answer: B

  Double Declining results in a higher depreciation in the first year. Therefore, Firm A shows lower assets, lower income and hence lower equity in the first year. Thus, its debt-to-equity and debt-to- asset ratios are higher than B's.

• Question 1965:

  In a given period, the firm's beginning gross investment is 6,000 and ending gross investment is 10,000. The accumulated depreciation at the beginning was 500 and the ending balance in this account was 1,500. The firm uses straight-line depreciation. Then, the average depreciable life of the firm's assets is ________.

  A. 6.67 years

  B. 6 years

  C. 10 years

  D. 12 years

  Correct Answer: C

  Note that: Average depreciable life = Ending Gross Investment/Depreciation expense. Depreciation expense = 1,500-500 = 1,000. Hence, ADL = 10,000/1,000 = 10 years.

• Question 1966:

  Which of the following marketable securities would provide the greatest liquidity and stability?

  A. None of these answers

  B. All of these answers

  C. AA corporate bonds that mature in 5 years

  D. Common stock of a publicly held firm

  E. U.S. treasury bills

  Correct Answer: E

  U.S. treasury bills would be the most liquid because the maximum maturity is 182 days (although most treasury bills purchased by firm's have a shorter maturity). In addition, the value of treasury bills would fluctuate less than the value of the common stock of another firm or long-term corporate bonds.

• Question 1967:

  Which of the following is/are current liabilities?

  I. Accounts receivable

  II. Cash advances received

  III. Advance magazine subscription payments received

  IV.

  Revenues from credit card fees

  A.

  II, III and IV

  B.

  II and III

  C.

  III and IV

  D.

  I, II, III and IV

  Correct Answer: A

  Accounts receivable represent current assets.

• Question 1968:

  If a company fails to record a material amount of depreciation in a previous year, this is considered

  A. an accounting error.

  B. a change in estimate.

  C. an unusual item.

  D. a change in accounting principle.

  Correct Answer: A

  This is neither unusual or a change, but simply an error.

• Question 1969:

  The weighted average method is based on the assumption that the cost of merchandise sold should be calculated using the :

  A. lower of cost or market (LCM)

  B. FIFO

  C. LIFO

  D. weighted average cost

  Correct Answer: D

  Under the weighted average method, inventory is priced at the average cost of the goods available for sale (Beginning inventory plus purchases during the period). The cost for the ending inventory under this method is influenced by all the prices paid during the period.

• Question 1970:

  An asset with a 10-year life has an acquisition cost of 5,000. The firm, using double declining method of depreciation has an accumulated depreciation of 2,440 at the end of year 3 (verify this!). The depreciation expense in year 4 is equal to ________.

  A. 467

  B. 630

  C. 512

  D. 731

  Correct Answer: C

  The book value at the beginning of year 4 = 5,000-2,440 = 2,560. Then, depreciation expense in year 4 = 2/10*book value = 512.