CFA Institute CFA-LEVEL-1 Online Practice Questions and Exam Preparation

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2101:

  When prices are rising, which of the following inventory valuation methods produces a higher profit?

  A. None of these answers
  B. FIFO
  C. LIFO
  D. Average cost
  B. FIFO

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  Explanation

  When prices are rising, FIFO will produce the highest profit because the first in (lowest cost) inventory is the first out. This leaves the most recently purchased inventory on hand and since it has the highest cost, ending inventory will have the greatest value which means that cost of goods sold will be the lowest and profits will be the highest (ending inventory = beginning inventory + net purchases - cost of goods sold).

• Question 2102:

  You have set up a test of a suitably phrased null hypothesis. After analyzing the statistical underpinnings of the test and the stringency requirements you have imposed, you have determined that the probability of rejecting the null hypothesis equals 30%. The probability that you will reject the null hypothesis when it is true is equal to 13% and the probability that you will reject the null hypothesis when it is false is equal to 17%. The significance level of your test equals ________.

  A. 17%
  B. 6%
  C. 30%
  D. 13%
  D. 13%

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  Explanation

  The significance level equals the probability of making a Type I error, which is the error of rejecting the null when it is, in fact, true. In this case, this has been given to be equal to 13%.

• Question 2103:

  Firm A uses the completed contract method and an otherwise identical Firm B uses percentage-of- completion method for revenue recognition in a project. Then, during the project,

  A. Firm A shows lower assets than B.
  B. Firm B shows higher inventory than A.
  C. Firm A shows higher equity than B.
  D. Firm A shows higher inventory than B.
  D. Firm A shows higher inventory than B.

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  Explanation

  Under the completed contract method, revenues and expenses are recognized only after the contract has been fulfilled. During all intermediate periods, costs are reported as inventory while revenues are treated as advances from customers. On the other hand, in the percentage-of-completion method, revenues are recognized in proportion to the percentage of the project completed, as measured by the costs incurred or engineering estimates available. Therefore, a firm shows higher assets and liabilities under completed contract method but lower equity than under percentage-of-completion.

• Question 2104:

  Which of the following statements is true?

  A. Short sales by specialists making up more than 50 percent of total short sales on an exchange is viewed as a bearish sign by technical analysts who try to follow the "smart money." Such an occurrence would be viewed as a long-range indicator of market performance.
  B. Short sales by specialists making up more than 50 percent of total short sales on an exchange is viewed as a sign of an approaching market peak by technical analysts who try to follow the "smart money." Such an occurrence would be viewed only as a short-range indicator of market performance.
  C. Short sales by specialists making up less than 30 percent of total short sales on an exchange is viewed as a sign of an approaching market trough by technical analysts who try to follow the "smart money." Such an occurrence would be viewed as a long-range indicator of market performance.
  D. Short sales by specialists making up less than 30 percent of total short sales on an exchange is viewed as a bullish sign by technical analysts who try to follow the "smart money." Such an occurrence would be viewed only as a short-range indicator of market performance.
  D. Short sales by specialists making up less than 30 percent of total short sales on an exchange is viewed as a bullish sign by technical analysts who try to follow the "smart money." Such an occurrence would be viewed only as a short-range indicator of market performance.

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  Explanation

  Specialists, who have access to the limit-order books for the stocks in their charge, are often studied by technical analysts trying to follow the "smart money." When their short sales make up over 50% of total short sales, this is viewed as

  bearish sign because of the implicit specialist expectation of declining share prices. When their short sales make up under 30% of total short sales, this is viewed as a bullish sign because of their implicit attempts to stay away from short

  sales.

  Specialist short sales typically make up 40% of total short sales.

• Question 2105:

  Why do the corporation's directors declare stock dividends?

  A. all of these answers
  B. to increase the number of shares outstanding
  C. to provide tangible evidence of management's confidence in the company's strong performance
  D. to keep the market value of the company's stock affordable
  A. all of these answers

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  Explanation

  Declaring a stock dividend will increase the number of shares outstanding and thereby keep the per share price low enough to be an attractive investment. Stock dividends may also show the company management's confidence in the present and future performance of the company.

• Question 2106:

  A very small p-value calculated in a sample implies that:

  A. the null hypothesis should be rejected.
  B. the null hypothesis is very likely true.
  C. the alternate hypothesis is very likely false.
  D. the null hypothesis should be accepted.
  A. the null hypothesis should be rejected.

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  Explanation

  The lowest significance level at which the null hypothesis can be rejected is called the p-value of the test. Thus, if the p-value is less than the significance level, the null hypothesis can be rejected at that significance level.

• Question 2107:

  Which of the following statements is false?

  A. The price to book value ratio is seldom greater than one for industrial firms. This is caused by the fact that due to accounting rules book value will exceed market value in most firms.
  B. Since cash flows are more stable than earnings the price to cash flow ratio should be used in conjunction with the P/E ratio.
  C. Economic value added (EVA) is a present value technique used to measure management's ability over time to add value to the firm through their investment decisions.
  D. Market Value Added equals the market value of the firm's capital minus the adjusted book value of the firm's capital.
  A. The price to book value ratio is seldom greater than one for industrial firms. This is caused by the fact that due to accounting rules book value will exceed market value in most firms.

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  Explanation

• Question 2108:

  Given that the real risk-free rate is 5%, the rate of inflation is 7%, and the growth in money supply is 9%, what is the exact nominal risk-free rate?

  A. 14. 5%
  B. 14%
  C. 12%
  D. Not enough information.
  E. 12. 4%
  E. 12. 4%

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  Explanation

  The nominal risk-free rate is equal to (1 + RFR) x (1 + I) - I, where RFR is the real risk-free rate and I is the inflation rate. In this question, the nominal risk-free rate is (1.05) x (1.07) - 1 = 0.124 = 12. 4%.

• Question 2109:

  Which of the following statements are correct?

  I. A company's choice of accounting principles for financial reporting purposes does not affect net cash flow for the accounting period.

  II. A company's choice of accounting principles for financial reporting purposes does not affect operating cash flow.

  III. If a company sells its receivables this will increase operating cash flow.

  IV.

  If a company sells its receivables this will increase financing cash flow.

  A. I and III
  B. I, II and III
  C. II and IV
  D. I and IV
  A. I and III

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  Explanation

  The choice of accounting principles affects only the classification and not the net cash flow, and reducing receivables in considered an increase in operating cash flow.

• Question 2110:

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

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  Explanation

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