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

• Question 2061:

  Hupta Corporation reports cost of goods sold for the year ended December 31, 1998 of $3,500. Other information as of December 31 is as follows:

  1997 1998

  Accounts Receivable $500 $550 Inventory $400 $380 Accounts Payable $250 $290

  Cash paid to suppliers for year ended December 31, 1998 is ________.

  A. $3,520

  B. $3,480

  C. $3,440

  D. $3,560

  Correct Answer: C

  An increase in accounts payable shows that $40 less than the $3,480 of purchases ($3,500 COGS + (20) change in inventory) was paid: $3,480 - $40 = $3,440.

• Question 2062:

  A firm using LIFO accounting has a LIFO reserve of 600, with a LIFO ending inventory of 4,900. It is currently in the 40% tax bracket. If it switches to FIFO accounting, it's equity ________.

  A. decreases by 240

  B. decreases by 360

  C. increases by 360

  D. increases by 240

  Correct Answer: C

  The presence of a LIFO reserve implies that by following LIFO, the firm has been able to deduct higher COGS from gross income than under FIFO (remember that LIFO reserve equals inventory value under FIFO minus inventory value under LIFO and this will be positive when the COGS under FIFO is lower than that under LIFO). thus, the retained earnings (and hence equity) is understated by LIFO Reserve*(1 - tax rate). Therefore, when the firm switches from LIFO to FIFO, the equity is increased by 600*(1 - 0.4) = 360.

• Question 2063:

  According to GAAP classification of cash flows, all of the following are investing cash flows except:

  A. purchase of an office building.

  B. gains on asset sales.

  C. dividends received from investments in stocks.

  D. takeovers financed partly with cash.

  Correct Answer: C

  Dividends received from stock investments are considered operating cash flows while dividends paid on equity are considered financing cash flows.

• Question 2064:

  Stock splits have the following effects on the financial statements except:

  A. the account title for common stock changes to reflect the change in the par value of stock

  B. contributed capital and retained earnings are unchanged

  C. disclosures about the stock on the balance sheet are changed to reflect the additional outstanding shares and the revised par value per share

  D. the shareholder's percentage interest in the corporation is changed by the percentage change in the market value of the stock

  Correct Answer: D

  The shareholder's percentage interest in the corporation is unchanged.

• Question 2065:

  An EPS amount is always shown for:

  A. all of these answers

  B. income before extraordinary items and the cumulative effect of accounting changes

  C. income from continuous operations

  D. cumulative effect of accounting changes

  Correct Answer: A

  All of these responses are true.

• Question 2066:

  A firm currently has a financial leverage ratio of

  2. After a thorough review, the firm's management has concluded that they have to write-down assets worth 200,000. This will cause the firm's financial leverage to ________.

  A. decrease

  B. insufficient information given

  C. increase

  D. stay constant

  Correct Answer: C

  The write-down of assets effectively decreases assets and equity by the same amount, once tax effects are correctly figured. Since A > E, a decrease in both quantities by the same amount increases the financial leverage (A/E) ratio.

• Question 2067:

  Which of the following is/are revenue recognition methods?

  I. Completed Contract Method

  II. Successful Efforts Method

  III. Deferred Collection Method

  IV.

  Full Cost Method

  A.

  I, II, III and IV

  B.

  I only

  C.

  I and III

  D.

  I, II and IV

  Correct Answer: B

  II and IV refer to the methods under which costs in drilling oil wells can be capitalized. There is no such thing as III.

• Question 2068:

  When using transactional analysis, the following changes in the balance sheet account and the corresponding cash flow description would be correct except,

  A. long-term debt; increase or decrease in debt

  B. rent payable; cash paid for inputs

  C. accounts payable; cash paid for inputs

  D. short-term debt; increase or decrease in debt

  E. retained earnings; dividends paid

  Correct Answer: B

  The cash flow of rent payable would be cash expenses.

• Question 2069:

  Over a given year, a firm's total assets increased by $7,000 and total liabilities decreased by $4,000. If the firm did not issue any new equity and paid out $1,500 in dividends, then its net income during the year was ________.

  A. $1,500

  B. $9,500

  C. $4,500

  D. $12,500

  Correct Answer: D

  Total assets - Total liabilities = Equity. Hence,

  Change in Assets - Change in Liabilities = Change in Equity.

  Thus, change in equity = 7,000-(-4,000) = $11,000

  All of the net income not paid out as dividends goes into increasing the equity. Since no new shares were

  issued, Net Income = change in equity + dividends paid. This gives net income = $11,000+$1,500 =

  $12,500.

• Question 2070:

  Which of the following is a current liability?

  A. Bonds

  B. Depreciation

  C. Preferred stock

  D. Accounts payable

  E. None of these answers

  Correct Answer: D

  Only accounts payable would be a current liability. Current liabilities must be settled over the longer of one year or a firm's operating cycle; thus, the maximum time frame for settlement is one year. Preferred stock is generally not repaid, bonds are repaid over many years and depreciation is an expense not a liability.