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

• Question 2121:

  According to SFAC 5, the condition(s) that must be met for revenue recognition to take place is

  A. the ability to measure the revenue amount.

  B. there must be no remaining significant contingent obligation that pertains to the sale.

  C. the verbal or written agreement of the sale.

  D. the ability to recognized when the revenue actually takes place.

  E. the completion of the earnings process and assurance of payment.

  Correct Answer: E

  The firm must have provided all or virtually all the goods/services for which it is to be paid and it must be possible to measure the total expected cost of providing these goods/services. Also, the seller must reasonably estimate the probability of nonpayment; if this cannot be assured, assurance of payment is not satisfied.

• Question 2122:

  The following financial statement depicts only one point in time:

  A. Income Statement

  B. Statement of Cash Flows

  C. Statement of Retained Earnings

  D. Balance Sheet

  Correct Answer: D

  Only the balance sheet depicts the company's financial position at one point in time. All others show what happens over a certain period of time.

• Question 2123:

  An increase in accounts payable would be considered ________.

  A. a non-cash charge to income

  B. an adjusting entry

  C. a use of cash

  D. a source of cash

  Correct Answer: D

  An increase in accounts payable shows a decrease in the outflow of cash.

• Question 2124:

  Which of the following statements about ratios is false?

  A. Analysis of ratios can identify areas that require further investigation.

  B. All of these answers are true.

  C. A ratio expresses a mathematical relation between two, or more, economically important quantities.

  D. The advantage of ratio analysis is that very little skill is required in interpreting the meaning of the ratios.

  E. Ratios must be interpreted with care since factors affecting the numerator can correlate with those affecting the denominator.

  Correct Answer: D

  The usefulness of ratio analysis is highly dependent upon skillful interpretation by the analyst.

• Question 2125:

  The primary purpose of the statement of cash flows is to:

  A. measure the change in the company's assets

  B. state the company's financial position at period-end

  C. provide information about a company's cash receipts and cash payments during the accounting period

  D. analyze net income during the accounting period

  Correct Answer: C

  Other financial statements are used to analyze revenues, expenses, assets, liabilities, and stockholders' equity. The statement of cash flows summarizes transactions affecting cash; it is the balance sheet that states the company's financial position at a point in time.

• Question 2126:

  Goodwill should:

  A. be expensed in the period in which it is purchased from another company or organization.

  B. not be amortized as it will be a benefit to the company over its entire life. Companies are assumed to have an indefinite life.

  C. written off over a 40 year period even if the superior earning power justifying its existence disappears.

  D. be amortized to income over a period not exceeding 40 years.

  Correct Answer: D

  Goodwill can be amortized over a maximum of 40 years. However, goodwill should be amortized over a number of periods equal to its ability to deliver superior earning power unless that period is over 40 years.

• Question 2127:

  Firm A uses Sum-of-digits and Firm B uses straight-line method of depreciation. In the first year, which of the following is/are TRUE?

  I. A shows higher equity than B.

  II. A shows lower assets than B.

  III. A shows a higher debt-to-equity ratio than B.

  IV.

  A shows a higher debt-to-asset ratio.

  A.

  III only

  B.

  I and III

  C.

  II, III and IV

  D.

  I and IV

  Correct Answer: C

  Sum-of-digits results in a higher depreciation in the first year. Hence, Firm A shows lower assets, lower income and hence lower equity. Thus, its debt-to-equity and debt-to-asset ratios are higher than B's.

• Question 2128:

  At the end of the fiscal period, the account debited to show the estimated amount of uncollectible accounts is

  A. Allowance for Uncollectible Accounts

  B. None of these answers is correct.

  C. Accounts Receivable

  D. Bad Debt Expense

  E. Unearned Revenue

  Correct Answer: D

  The adjusting entry should recognize an expense and increase the allowance account.

• Question 2129:

  Under US GAAP accounting, RandD expenses cannot be capitalized. They must be expensed as and when incurred. Which of the following is NOT a reason to support this practice?

  A. Most RandD activities represent intangible benefits which are hard to evaluate objectively from an accounting perspective.

  B. In most cases, there is a significant lag between RandD expenses and the determination of the potential success of the research.

  C. There remains a high uncertainty about the ultimate benefits to be derived from the RandD activities on which the expenses are incurred.

  D. RandD expenses are difficult to measure and hence, must be expensed in accordance with accrual accounting principles.

  Correct Answer: D

  Note that RandD expenses are, for the most part, are clearly ear-marked as such and hence, are not difficult to measure. Of course, some of these expenses go into generating tangible assets like laboratories and flasks but these are easily measurable and do get capitalized under US GAAP. The other three reasons imply that it is difficult to measure the present value of the assets being generated (if at all) by the research. This prevents a consistent and reliable application of the accrual principles, which require allocation of expenses in proportion to the current benefits generated. Hence, US GAAP takes the easiest solution of expensing all the RandD costs.

• Question 2130:

  The following is true about the price earnings ratio

  A. all of these answers are correct

  B. the ratio is calculated based on the expected earnings per share for the next period

  C. stocks have low PE ratios if they are less than five to eight and are considered underpriced

  D. it is the ratio between the company's current market value and its earnings per share

  Correct Answer: A

  PE ratio is calculated based on expected earnings per share and a ratio of less than 5 to 8 makes a stock appear underpriced.