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

• Question 2131:

  If a company receives an unqualified audit opinion, it means the auditors

  A. are providing assurance that the company's financial statements are free from misstatement, fraudulent accounting and fairly indicate future performance.

  B. are providing assurance that the company will remain financially viable for at least the next year.

  C. are providing assurance that the company's financial statements fairly present company's financial performance and position.

  D. did not complete a full audit and therefore do not feel qualified to give and opinion on financial statements.

  Correct Answer: C

• Question 2132:

  Which inventory costing method is most useful in estimating the amount of inventory lost or destroyed by theft, fire, or other hazards?

  A. average cost method

  B. LIFO

  C. none of these answers is correct

  D. FIFO

  E. gross profit method

  Correct Answer: E

  The historical relationship between cost of goods sold and sales is applied to sales of the current period as a way of estimating COGS during the current period. COGS is then subtracted from the cost of goods available for sale to get the estimated cost of the ending inventory.

• Question 2133:

  The main purpose of a statement of cash flows of a firm is to provide relevant information about

  A. differences between net income and associated cash receipts and disbursements.

  B. the cash receipts and cash disbursements of an enterprise during a period.

  C. a firm's ability to generate future positive net cash flows.

  D. a firm's ability to meet cash operating needs.

  E. none of these answers.

  Correct Answer: B

  The statement cash flows helps investors, creditors and other users to assess the firm's ability to generate net cash inflows, meet its obligations, pay dividends and obtain external financing.

• Question 2134:

  All of the following are often characteristics of intangible assets except:

  A. they are often non-separable from a company.

  B. the value of the assets portrayed in the financial statements tends to increase for companies performing a lot of RandD.

  C. they have indefinite benefit periods.

  D. they experience large valuation changes based on competitive circumstances.

  Correct Answer: B

  The value of intangible assets on the balance sheet can only increase when the assets are purchased from another company. This is to encourage conservatism on the balance sheet.

• Question 2135:

  When the weighted average method is used, ending inventory units are priced at the

  A. none of these answers is correct

  B. earliest price

  C. average price

  D. lower of cost or market

  Correct Answer: C

  Under the weighted average method, inventory is priced at the average cost of the goods available for sale (Beginning inventory plus purchases during the period).

• Question 2136:

  Investments in debt securities classified as held-to-maturity securities should be valued at

  A. fair value.

  B. lower of cost or market.

  C. present value.

  D. amortized cost.

  E. acquisition cost.

  Correct Answer: D

  Accounting rules specify that debt securities classified as held-to-maturity must be valued at amortized cost.

• Question 2137:

  The cash conversion cycle equals:

  A. receivables days - inventory processing days + payables payment period.

  B. receivables days - inventory processing days - payables payment period.

  C. receivables days + inventory processing days + payables payment period.

  D. receivables days - payables payment period + inventory processing days.

  Correct Answer: D

  The cash conversion cycle is a measure of how long the cash is tied up in short term loans and credits. These short-term financing items include receivables, inventory and accounts payable. The first two of these represent sources of cash while accounts payable represent a future drain of cash. So the cash conversion cycle is defined as: CCC = (Average receivables collection period) plus (Average inventory processing time) minus (Average payables payment period). A low cash conversion cycle could indicate that you are either collecting your debts or churning inventory faster or you are paying your bills slower.

• Question 2138:

  A firm has a cash conversion cycle of 31.6 days. It turns over its inventory on average in 43.1 days and pays off its payables in an average of 23.2 days. Its receivables turnover ratio equals ________.

  A. 31.2

  B. 42.3

  C. 14.9

  D. 25.1

  Correct Answer: A

  CCC = (Average receivables collection period) plus (Average inventory processing time) minus (Average payables payment period). Hence, 31.6 = Average receivables collection period + 43.1 - 23.2, giving Average receivables collection period = 31.6 - 43.1 + 23.2 = 11.7 days. Since Average receivables collection period = 365/receivables turnover, the receivables turnover ratio equals 365/11.7 = 31.2.

• Question 2139:

  Contingent losses are recognized:

  I. when they actually occur during a contingency.

  II. only if it is probable that a loss will occur.

  III. only if the amount of the loss can be reasonably estimated.

  IV.

  at the management's discretion.

  A.

  II, III and IV

  B.

  I only

  C.

  II and III

  D.

  II and IV

  Correct Answer: A

  II and III must hold together for a recognition of contingent losses to take place. GAAP defines "probable" as "greater than 50% chance." Since this is subjective, the management has considerable discretion on the timing of recognition.

• Question 2140:

  Firm A currently shows assets worth 2,000 and equity of 1,500. During the year, it capitalized interest expense worth 200, of which 50 was depreciated/amortized. The firm faces a tax rate of 50%. If the firm had expensed the interest paid, which of the following would be true?

  A. Its assets would be stated at 1,750.

  B. Its assets would be stated at 1,850.

  C. Its assets would be stated at 2,000.

  D. Its assets would be stated at 1,800.

  Correct Answer: B

  If the firm's assets without capitalization equal A, then we have A+200-50 = 2,000. Hence, A = 1,850.