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

• Question 2011:

  Book value of a company is equal to all of the following except

  A. the amount resulting if the company were to liquidate at amounts reported on the balance sheet.

  B. total assets reduced by claims against them.

  C. the market value of the net assets.

  D. net asset value.

  Correct Answer: C

  The book value of a company is its value based on the balance sheet. The balance sheet is historical and after day 1 of operations the book value of a company is almost never equal to the market value of the company.

• Question 2012:

  A firm has purchased a building with a useful life of 7 years. It cost $35,000 and its salvage value is estimated at $5,000. If the firm uses double declining method, what's the depreciation expense recognized in Year 2?

  A. $9,125

  B. $7,143

  C. $10,000

  D. $6,857

  Correct Answer: B

  In Double Declining method, depreciation = (2/n)*book value. In Year 1, depreciation = (2/7)*35,000 = 10,000. Hence, in Year 2, depreciation = (2/7)*(35,000-10,000) = $7,143.

• Question 2013:

  Which of the following would affect the comparability of accounting information for a given company from one accounting period to the next?

  I. Change in accounting principles

  II. Disposition of segment of business

  III. Acquisition of company accounted for using purchase accounting

  IV.

  Change in auditors

  A.

  I, III and IV

  B.

  I and III

  C.

  I, II and III

  D.

  I and II

  Correct Answer: C

  A change in the representation by an accounting firm has no material effect on the accounting information.

• Question 2014:

  The Basic EPS represents which of the following?

  I. The net income divided by number of shares outstanding.

  II. The amount of net income available for distribution to common stock holders, per share.

  III. The net income after preferred dividends, expressed per common share.

  IV.

  Net income after preferred dividends divided by total equity.

  A.

  II and III

  B.

  III and IV

  C.

  I, II and IV

  D.

  I, II, III and IV

  Correct Answer: A

  For a simple capital structure, Basic EPS = (Net Income - Preferred dividends)/weighted # of common shares = The amount of net income available for distribution to common stock holders, per share. Net income after preferred dividends divided by total equity is not true since total equity includes preferred equity whereas the denominator of Basic EPS consists only of common shares.

• Question 2015:

  Compared with firms with capital leases, firms with operating leases generally report

  A. lower cash flow from operations.

  B. lower or higher cash flow from operations depending upon market interest rates.

  C. higher cash flow from operations.

  D. identical cash flow from operations.

  Correct Answer: A

  The lease payment is an outflow in the CFO section.

• Question 2016:

  Which of the following is not subject to depreciation?

  A. automobiles

  B. machinery

  C. land

  D. land improvements

  Correct Answer: C

  Land has unlimited useful life and is not consumed when it is used, and therefore not subject to depreciation.

• Question 2017:

  When preparing a direct method statement of cash flows, the calculation of equity financing cash flows requires analysis of the change in stockholders' equity, separating all of the following except

  A. investments in affiliates.

  B. dividends declared.

  C. net income.

  D. shares issued/repurchased.

  E. changes in valuation accounts.

  Correct Answer: A

  Cash flows from investments in joint ventures and affiliates and long-term investments in securities are components of cash flows from investing activities.

• Question 2018:

  Which would not be categorized as an unusual or infrequent item?

  A. provisions for environmental remediation

  B. gains or losses from disposal of a portion of a business segment

  C. restructuring costs

  D. gains or losses on qualifying early retirement of debt

  E. employee separation costs

  Correct Answer: D

  Gains or losses on qualifying early retirement of debt is classified as an extraordinary item, not an unusual or infrequent item.

• Question 2019:

  Companies A and B, similar in all respects, recently bought identical securities. However, using the "Management intent" rule, A has classified the securities as "trading" securities while B has categorized them as "available-for-sale" securities. Which of the following statements is/are true as a result of this difference?

  I. A and B will show same assets on their balance sheets.

  II. A will have a higher income volatility than B.

  III.

  A will have a higher cash flow volatility than B.

  A.

  II and III

  B.

  III only

  C.

  I and III

  D.

  I, II and III

  Correct Answer: D

  Both "trading" and "available-for-sale" securities are reported at their fair market value on the balance sheet. Hence, the reported assets for A and B are not affected by the different classifications. However, changes in the market value of trading securities are considered part of the Income statement while changes in the market value of available-for-sale securities are charged directly to the retained earnings account. This will cause a higher volatility in the income of A. Further, this higher volatility in income leads to a higher volatility in tax payments, thus causing a higher volatility in the cash flows.

• Question 2020:

  When financial statements are presented that are not in conformity with generally accepted accounting principles, an auditor may express a Qualified Opinion Disclaimer of an Opinion

  Qualified Opinion Disclaimer of an Opinion

  I. Yes No

  II. Yes Yes

  III. No Yes

  IV.

  No No

  A.

  II

  B.

  III

  C.

  I

  D.

  IV

  Correct Answer: C

  Departures from GAAP may result in either a qualified or an adverse opinion. The auditor must exercise judgment as to the materiality of the departure. If the departure from GAAP is not sufficiently material to require an adverse opinion, the auditor should express a qualified opinion.