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

• Question 2041:

  A firm using LIFO accounting has a LIFO reserve of 4,700, with a FIFO ending inventory of 34,600. It is currently in the 40% tax bracket. If it switches to FIFO accounting for reporting purposes, it's deferred taxes ________.

  A. decrease by 2,820

  B. increase by 2,820

  C. increase by 1,880

  D. decrease by 1,880

  Correct Answer: C

  When the firm switches from LIFO to FIFO, it must recognize the additional tax liability that arises because the taxes not paid in the past will now have to be paid. This liability equals the LIFO reserve times the current tax rate and must be added to the deferred taxes account (to be completely accurate, you would have to go back all the way to the inception of the firm and recalculate historical taxes. This is never done).

• Question 2042:

  Which of the following methods does a company use to determine what the balance of the allowance for uncollectible accounts should be?

  A. percent of accounts receivable

  B. neither of these answers are correct

  C. both of these answers are correct

  D. aging

  Correct Answer: C

  The aging and percent of Accounts Receivable methods calculate what the balance of the allowance account should be, however, percent of net sales method calculates the actual expense for the period.

• Question 2043:

  Extraordinary items are presented on the income statement:

  A. net of taxes, separate from income from continuing operations.

  B. in the footnotes, with the required disclosures.

  C. as part of income from continuing operations, before taxes.

  D. none of these answers.

  Correct Answer: A

  The present GAAP applied to extraordinary items is a refined form of the "Current Operating Performance." It mandates that income effects of extraordinary items are to be separately disclosed net of taxes after the presentation of the net income from continuing operations.

• Question 2044:

  Analysis, Inc. had gross sales of 5,000 last year. Its operating expenses amounted to 339 and cost of goods sold equaled 2,386. Analysis faces a corporate tax rate of 37% and had no other revenues or costs last year. Its net income after taxes was ________.

  A. 1,647

  B. 1,433

  C. 2,275

  D. 1,308

  Correct Answer: B

  Analysis' gross profit = gross sales - cost of goods sold = 5,000 - 2,386 = 2,614. The operating expenses are deductible for tax purposes. Hence, pre-tax income equaled 2,614 - 339 = 2,275. Therefore, its after-tax income equals 2,275*(1- 0.37) = 1,433.

• Question 2045:

  Which of the following qualifies as a disposal of a segment of a business?

  A. Perrier Inc., producer of bottled spring water and soft drinks, discontinues production of its bottled spring water. This operation is self-contained.

  B. Superpharm Drugs, operator of chain of discount drug stores, reaches an agreement to sell its Boston location to a competitor.

  C. Irving Inc. supplies its own service stations and independent operators from its refineries. The firm decides to discontinue marketing to independents.

  D. None of these answers.

  E. Treadrite, a shoe manufacturer, has decided to discontinue its line of work boots. The firm's operations are concentrated in single plant.

  Correct Answer: A

  A segment is a component of an entity whose activities represent a separate major product line and activities can be physically and operationally distinguished from the remainder of the entity for financial reporting purposes. The discontinued spring water operation thus qualifies as disposal of a segment.

• Question 2046:

  A product financing arrangement exists when

  A. the party who manufactures the inventory gives extended terms to certain preferred customers.

  B. a party transfers ownership of inventory to a purchaser yet retains the inventory in their own warehouse.

  C. all of the answers would be accounted for as product financing arrangements.

  D. a party bearing the risks and rewards of ownership transfers inventory to a purchaser, and in a related transaction agrees to repurchase the product at a specified price over a specified time.

  Correct Answer: D

  The key to product financing is that the purchaser retains very little of the risk because typically whatever does not sell, the seller agrees to buy back at a specified price.

• Question 2047:

  Which of the following groups will have seniority in the event of bankruptcy of a company?

  A. all have same seniority

  B. preferred stockholders

  C. common stockholders

  D. debt holders

  Correct Answer: D

  Debt holders are paid first.

• Question 2048:

  What does FASB refer to?

  A. The Financial Analysts Standards Board.

  B. The Federal Accounting Society Board of Directors.

  C. The Financial Accounting Standards Board.

  D. None of these answers.

  Correct Answer: C

  The Financial Accounting Standards Board.

• Question 2049:

  The following data have been extracted from the financial statements of a firm for two years, 1993 and 1994:

  1993 1994 Assets 10,895 12,444 Sales 8,465 9,275 Inventory 3,126 3,549 COGS 7,120 7,387 The average inventory processing period for 1994 equals ________.

  A. 164.9 days

  B. 223.6 days

  C. 114.7 days

  D. 198.2 days

  Correct Answer: A

  This can be estimated using either net sales (as is the case with receivables) or the cost-of-goods- sold. COGS is preferable since it does not include the profit margins involved in net sales.

  Therefore, two relevant ratios are:

  a.

  Inventory turnover ratio = COGS/average inventory.

  b.

  Average inventory processing period = 365/inventory turnover.

  Typically, average inventory for a given year is taken to be the average of the ending values of the inventory for this year and the last year. For 1994, the average inventory equals (3549+3126)/2 = 3,338. Inventory turnover ratio = 7,387/3,338 = 2.21. Average inventory processing period = 365/2.21 = 164.9 days.

• Question 2050:

  The reason that the translation of foreign subsidiaries will generate discrepancies between the changes in accounts reported on the balance sheet and those reported in the cash flow statement is

  A. the change in the exchange rate does not appear on the balance sheet but will appear as a component of cash collections it is not a change resulting from operations.

  B. the change in the exchange rate appears as part of the balance of accounts receivable on the balance sheet but will not appear as a component of cash collections because it is not a change resulting from operations.

  C. the change in the exchange rate does not appear on the balance sheet but will appear as a component of cash from financing activities.

  D. the change in the exchange rate appears as part of the stockholders' equity on the balance sheet but will not appear as a component of cash collections because it is not a change resulting from operations.

  Correct Answer: B

  Thus, cash flow from operations does not include the effects of the translation process.