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

• Question 2091:

  Which of the following information would not be filed with the SEC by a publicly company?

  A. proxy statement

  B. tax return

  C. 10K report

  D. prospectus

  Correct Answer: B

  Tax returns are filed with the IRS.

• Question 2092:

  Under an inflationary environment with stable inventories, a firm may change to LIFO from FIFO due to which of the following reason(s)?

  I. To allow earnings manipulation.

  II. To improve the reported current ratio.

  III. To reduce tax drain on cash.

  IV.

  Show a more accurate representation of reported assets than FIFO.

  A.

  I, II, III and IV

  B.

  I and II

  C.

  I and III

  D.

  I, III and IV

  Correct Answer: C

  Under LIFO, inventory is understated and hence, current ratio is understated under normal, inflationary conditions. At the same time, COGS is larger than under FIFO due to rising prices, reducing the taxable income and leading to lower taxes. Further, firms can manipulate earnings under LIFO by changing purchasing patterns at the end of an accounting period. This happens because the LIFO COGS is determined by the prices of the latest goods purchased.

• Question 2093:

  Which of the following statements about stock dividends is true?

  A. Stock dividends are dividends given in the form of stock from another company.

  B. Stock dividends are more valuable than stock splits.

  C. Stock dividends are recorded as a reduction in cash.

  D. Stock dividends increase the number of shares outstanding.

  Correct Answer: D

  Stock dividends increase the number of shares outstanding of the issuing company and do not reduce cash.

• Question 2094:

  Which of the following would affect the comparison of financial statements across two different firms?

  I. different accounting principles

  II. different accounting estimates

  III. different reporting periods

  IV.

  different industries

  A.

  I and IV

  B.

  I, III and IV

  C.

  I, II, III and IV

  D.

  I and II

  Correct Answer: C

  All of these responses would affect the comparison of financial statements across two different firms.

• Question 2095:

  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

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

  A. -$12,500

  B. -$45,000

  C. -$57,500

  D. -49,500

  Correct Answer: C

  Items c and e are the financing cash flows.

• Question 2096:

  On a statement of cash flows that uses the indirect approach, calculation of cash flow from operations treats depreciation as an adjustment to reported net income because

  A. depreciation is a direct source of cash.

  B. depreciation is an outflow of cash to a reserve account for the replacement of assets.

  C. depreciation reduces net income but does not involve an outflow of cash.

  D. depreciation reduces net income and involves an outflow of cash.

  Correct Answer: C

  Depreciation is an expense that reduces net income, but it is a non-cash item.

• Question 2097:

  Capital stock (common stock)

  A. is a higher risk investment vehicle for the buyer than would be the purchase of bonds or preferred stock.

  B. represents the residual ownership of a firm.

  C. none of these answers.

  D. is typically the only type of stock that maintains voting privileges.

  Correct Answer: B

  Capital (common) stock is a class of stock that represents ownership interest in a firm. Common stockholders are typically the only shareholders that have voting privileges because they are the true owners of the firm. Investors bear the greatest risk when purchasing common stock because common stockholders stand last in line when it comes to the payment of income, or assets in the event of liquidation. By like token, common stockholders reap the greatest rewards because all earnings of a firm in excess of all obligations belong to the common stockholders.

• Question 2098:

  The following data are available for a firm for a given year:

  Net Sales 21,896 Sales and marketing expenses 4,346 Administrative expenses 2,143 COGS 10,084 Depreciation 967 Interest expense 573 Tax rate 35% Dividends paid 3,445 Preferred Dividends 897 Average total equity 37,432 Average common equity 26,782 Average total liabilities 18,583

  In the above example, the firm's net profit margin equals ________.

  A. 0.23

  B. 0.17

  C. 0.20

  D. 0.11

  Correct Answer: D

  Net Profit Margin = Net Income/Net Sales Net Income = Earnings after depreciation, interest expense and

  taxes

  = (21,896 - 4,346 - 2,143 - 10,084 - 967 - 573)*(1 - 0.35) = 2,459.

  Therefore, Net Profit Margin = 2,459/21,896 = 0.11.

• Question 2099:

  Stock dividends have the greatest impact on which section of the balance sheet?

  A. total assets

  B. total stockholders' equity

  C. total assets and total stockholders' equity

  D. retained earnings

  E. the components of stockholders' equity

  Correct Answer: E

  The effect of stock dividends is recorded by transferring part of the retained earnings to the contributed capital accounts. Because of the increase in contributed, it is often described as capitalizing retained earnings.

• Question 2100:

  To examine the trends over time within a single firm or compare firms of different sizes, you should use:

  A. balance-sheet analysis.

  B. common industry analysis.

  C. common-size statements.

  D. cash flow analysis.

  Correct Answer: C

  Common size statements normalize the financial data to allow easier comparison of different-size firms.