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

• Question 2001:

  The following account is affected when recording a return of inventory to the vendor under a perpetual inventory system.

  A. purchase returns and allowances

  B. accounts receivable

  C. cash

  D. merchandise inventory

  Correct Answer: D

  When inventory is purchased, Merchandise Inventory is debited, and credited when returned. The periodic system records purchases in an account called Purchases and returns are booked to Purchases Returns and Allowances.

• Question 2002:

  Which of the following would not be reported as an extraordinary item?

  A. gain or loss on sale of fixed assets

  B. gain or loss from passing of a new law

  C. gain or loss from early retirement of debt

  D. uninsured loss from a flood

  Correct Answer: A

  An item must be both unusual and infrequent (and material in amount) to be classified as extraordinary.

• Question 2003:

  The accrual basis of accounting:

  A. is used only for taxes reporting purposes.

  B. recognizes the development of assets and liabilities externally.

  C. does not pertain to revenue recognition-only expense recognition.

  D. begins with the cash basis of accounting and proceeds to make the necessary adjustments.

  E. allocates many transactions that produce cash flows to time periods other than those in which the cash flows occur.

  Correct Answer: E

  Accrual accounting principles are the decision rules that state when to recognize the revenue and expense consequences of cash flows and other events.

• Question 2004:

  Under a periodic inventory system, how is COGS determined?

  A. the cost of ending inventory is subtracted from costs of goods available for sale

  B. cost of goods sold is accumulated as sales are made

  C. ending inventory is counted and subtracted from beginning inventory

  D. none of these answers

  Correct Answer: A

  Under the periodic inventory system, only the ending inventory is counted and priced. Cost of goods sold is determined by deducting the cost of the ending inventory from the cost of goods available for sale.

• Question 2005:

  In preparing its cash flow statement for the year ended December 31, 1998, Roman Co. collected the following data:

  Gain on sale of equipment $6,000 Proceeds from sale of equipment 10,000 Purchase of A.S. Inc. bonds (par value $200,000) 180,000 Amortization of bond discount 2,000 Dividends declared 45,000 Dividends paid 38,000 Proceeds from sale of treasury stock (carrying amount of $65,000) 75,000

  In its December 31, 1998 statement of cash flows, what amount should Roman report as net cash provided by financing activities?

  A. $20,000

  B. $37,000

  C. $75,000

  D. $30,000

  E. $27,000

  Correct Answer: B

  Financing activities include the issuance and repurchase of shares, dividends paid and changes in longterm liabilities. In this case, there were dividends paid of $38,000 and proceeds from sale of treasury stock of $75,000. Therefore, the net cash provided from financing activities is $37,000 ($75,000-38,000).

• Question 2006:

  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

  The operating cash flow for 1998 was ________.

  A. $32,700

  B. $29,200

  C. $20,200

  D. $7,700

  Correct Answer: C

  Items f, g, h and i are operating events.

• Question 2007:

  Which of the following best describes the distinction between expenses and losses?

  A. Losses result from peripheral or incidental transactions, whereas expenses result from ongoing major or central operations of the entity.

  B. Losses are extraordinary charges, whereas expenses are ordinary charges.

  C. Losses are reported net of related tax effect, whereas expenses are not reported net of tax.

  D. Losses are material items, whereas expenses are immaterial items.

  E. None of these answers.

  Correct Answer: A

  Expenses are outflows or other using up of assets or incurrence of liabilities from delivering or producing goods, services or key operations. Losses are defined as decreases in equity (net assets) except those that result from expenses or distributions to owners.

• Question 2008:

  A firm has 1,000 common shares valued at 30 each outstanding. It has also issued 500 preferred shares of face value 100 and a coupon of 5% and a debt of 50,000 with a coupon rate of 6%. The firm's net income after taxes is 14,300. Then, the EPS reported by the firm is ________.

  A. 7.87

  B. 11.8

  C. 14.3

  D. 8.8

  Correct Answer: B

  For a simple capital structure, Basic EPS = (Net Income - Preferred dividends)/weighted # of common shares Therefore, Basic EPS = (14,300 - 500*100*5%)/1,000 = 11.8.

• Question 2009:

  Investments in available-for-sale securities should be valued on the balance sheet at ________.

  A. amortized cost

  B. lower of cost or market for the portfolio

  C. lower of cost or market for individual securities

  D. fair value

  E. acquisition cost

  Correct Answer: D

  Available-for-sale securities are investments in debt securities that are not classified as held-to- maturity or trading securities and in equity securities with readily determinable fair values that are not classified as trading securities. They are measured at fair value on the balance sheet.

• Question 2010:

  Beginning inventory of 50 units, purchased at $5 50 units purchased at $10 35 units purchased at $9 25 units sold at $15 70 units sold at $12 Tax rate = 40% Beginning LIFO reserve = $300

  Given the above, the LIFO reserve at the end of the period is ________.

  A. $225

  B. $185

  C. $135

  D. $165

  Correct Answer: D

  COGS = Beginning inventory - Ending inventory + Purchases.

  FIFO COGS = 50*5 + 45*10 = $700. LIFO COGS = 35*9 + 50*10 + 10*5 = $865. Beginning inventory =

  50*5 = $250. Purchases = 50*10 + 35*9 = $815.

  Therefore, FIFO ending inventory = 250 + 815 - 700 = 365 and LIFO ending inventory = 250 + 815 - 865 =

  200.

  The LIFO Reserve is defined as the difference between the values of the inventory under FIFO and under

  LIFO. Therefore, LIFO reserve = 365 - 200 = 165.