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

• Question 1981:

  Which of the following would not be considered an intangible asset?

  A. Customer lists

  B. All of these answers represent intangible assets

  C. Mineral rights

  D. Patents, copyrights, and trademarks

  E. Goodwill

  Correct Answer: C

  Intangibles represent rights, privileges, and benefits of possession. Two common characteristics are high uncertainty regarding future benefits and lack of physical existence. All of the above are examples thatmeet this definition except mineral rights which are not an intangible but a natural resource that has physical properties.

• Question 1982:

  Intraperiod income tax allocation arises because

  A. certain revenues and expenses appear in the financial statements but are excluded from taxable income.

  B. items included in the determination of taxable income may be presented in different sections of the financial statements.

  C. income taxes must be allocated between current and future periods.

  D. certain revenues and expenses appear in the financial statements either before or after they are included in taxable income.

  E. none of these answers.

  Correct Answer: B

  To provide a fair presentation of the results of operations, accounting rules require that income tax expense for the period be allocated among income from continuing operations, discontinued operations, extraordinary items, and items charged or credited to shareholders' equity.

• Question 1983:

  The following financial data on CashCow, Inc. have been taken from its financial statements for 1996:

  a.

  Dividends paid $25,000

  b.

  Sale of land $64,000

  c.

  Inventory purchases $29,000

  d.

  Purchase of a warehouse $208,000

  e.

  Bonds issued $90,000

  f.

  Dividends received from investments $17,000

  g.

  Interest paid on bonds $2,400

  h.

  Salaries paid $107,400

  i.

  Cash collection from customers $28,400

  j.

  Loss on land sale $18,000

  k.

  Beginning cash balance $312,000

  In the above question, the investing cash flow is ________.

  A. -$208,000

  B. -$126,000

  C. -$144,000

  D. -$162,000

  Correct Answer: C

  Items b and d are the investing cash flows. Note that item j is a non-cash event.

• Question 1984:

  The following information was obtained from the financial statements of Firm A:

  Current assets = $4,500 Current liabilities = $3,000

  Long-range assets = $150,000 Long-term liabilities = $42,000 Contributed capital = $31,000

  Then, the retained earnings of the firm equal ________.

  A. $39,000

  B. $31,000

  C. $78,500

  D. $123,500

  Correct Answer: C

  Total assets = Total liabilities + Total Equity

  Total Equity = Retained earnings + contributed capital.

  Total assets = $4,500+$150,000 = $154,500.

  Total liabilities = $42,000+$3,000 = $45,000, hence,

  Total equity = $154,500-$45,000 = $109,500

  Retained earnings = $109,500-$31,000 = $78,500

• Question 1985:

  Which of the following is considered a characteristic of equity?

  A. None of these answers.

  B. All forms of equity must ultimately be repaid by a business.

  C. Compensation to the holders of equity takes precedence over that required to the holders of liabilities.

  D. Equity represents the residual ownership of a business.

  E. Equity represents a claim against a business that is senior to liabilities.

  Correct Answer: D

  Equity refers to the claims of the owners of a business. Equity investors expose themselves to greater risk than the holders of liability claims because owner's claims are junior to liability instruments. Equity claims against income and assets are last in line; thus, they are residual.

• Question 1986:

  When a firm's inventory undergoes LIFO liquidation under rising prices, it experiences ________.

  A. higher income and higher cash flows

  B. higher income and lower cash flows

  C. lower income and lower cash flows

  D. lower income and higher cash flows

  Correct Answer: B

  In LIFO liquidation under rising prices, the quantity of goods purchased during a period is less than the quantity sold. This leads to a sale of goods purchased in prior periods at lower prices (since prices are rising). This understates the cost- of-goods-sold (COGS), thus overstating the income and causing higher taxes than in the absence of the LIFO liquidation. The higher taxes cause a higher cash outflow. (This is an extremely important topic that you should be completely familiar with)

• Question 1987:

  A thorough analysis of financial statements should include an examination of which of the following sources of information?

  A. All of these are correct.

  B. The report of the independent external auditor.

  C. Management's discussion and analysis of its financial condition and results of operation.

  D. Form 10-K reports.

  E. Explanatory footnotes that accompany financial statements.

  Correct Answer: A

  All of these statements are correct. Management's discussion and analysis, footnotes and Form 10-K reports provide important details as to the company's balance sheet, income statement and overall financial condition; auditors reports will indicate if the financial information that is presented complies with generally accepted accounting principles.

• Question 1988:

  Form 10-K is filed with the SEC to update the information a company supplied when filing a registration

  statement under the Securities Exchange Act of 1934. Form 10-K is a report that is filed

  A. semiannually within 30 days of the end of a company's second and fourth fiscal quarters.

  B. quarterly within 45 days of the end of each quarter.

  C. within 15 days of the occurrence of significant events.

  D. none of these answers.

  E. annually within 90 days of the end of a company's fiscal year.

  Correct Answer: E

  Form 10-K is the annual report to the SEC. It must be filed within 90 days after the corporation's yearend. It must contain audited statements.

• Question 1989:

  Patterson Company has the following information of one of its vehicles purchased on January 1, 1992:

  Vehicle cost $50,000 Useful life, years, estimated 5 Useful life, miles, estimated 100,000 Salvage value, estimated $10,000

  Actual miles driven:

  1992 30,000 1993 20,000 1994 15,000 1995 25,000 1996 12,000

  No estimates were changed during the life of the asset. The 1996 depreciation expense using the units-ofproduction method was ________.

  A. $4,800

  B. $4,000

  C. $6,000

  D. $10,000

  E. $5,000

  Correct Answer: B

  Under the units-of-production method, periodic depreciation is based on the proportion of expected total production that occurred. For the years 1992 to 1995, the total accumulated depreciation was $36,000 (($50,000-10,000) X (30,000 + 20,000 + 15,000 + 25,000) / 100,000(. Therefore, the remaining depreciation for the last year, 1996, is only $4,000 ($40,000-36,000). Given that the 12,000 miles driven in 1996 exceeded the remaining estimated production of 10,000 miles, only $4,000 can be taken as depreciation in 1996.

• Question 1990:

  The peaks and valleys of the business cycle tend to be magnified using which inventory method?

  A. LIFO

  B. FIFO

  C. gross profit method

  D. weighted average

  Correct Answer: B

  Businesses tend to increase selling prices as costs rise, regardless of the fact that inventories may have been purchased before the price rise. The reverse effect occurs in periods of price decreases.