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

• Question 2171:

  What entity is presently responsible for establishing accounting standards?

  A. The Financial Accounting Standards Board.

  B. The FDA.

  C. The Securities and Exchange Commission.

  D. The Internal Revenue Service.

  E. The Federal Accounting Society Board of Directors

  Correct Answer: A

  The Financial Accounting Standards Board.

• Question 2172:

  The relationship of the total debt to the total equity of a firm is a measure of ________.

  A. liquidity

  B. creditor risk

  C. none of these answers

  D. profitability

  E. solvency

  Correct Answer: B

  The ratio of total debt to total equity is a measure of risk to creditors because it helps in evaluating a company's relative reliance on debt and equity financing.

• Question 2173:

  The amount by which a plant asset depreciated is classified as ________.

  A. revenue

  B. an expense

  C. a liability

  D. an asset

  Correct Answer: B

  Depreciation is the periodic allocation of the cost of a tangible, long-term asset over its estimated useful life, and therefore a period expense.

• Question 2174:

  Under what condition would a firm report cash, or cash equivalents as a long-term asset?

  A. When a firm maintains less than its' minimum target cash balance.

  B. When funds are set aside for a specific long-term purpose such as plant expansion.

  C. All of these answers.

  D. When a firm has an under-funded pension obligation.

  E. None of these answers.

  Correct Answer: B

  A firm may maintain cash equivalents that are earmarked for plant expansion, sinking fund payments, or other long-term uses. In these situations many firms would report this portion of its cash, or cash equivalents as long-term because these funds are not available in the daily operation of the business.

• Question 2175:

  At the beginning of fiscal 1998 Jones Company had retained earnings of $1,000,000 and at the beginning of fiscal 1999 Jones Company had retained earnings of $1,200,000. During fiscal 1998 Jones Company declared a dividend of $300,000 and declared a 3 for 1 stock split. How much did Jones Company earn during fiscal 1998?

  A. $200,000

  B. $166,667

  C. $600,000

  D. $500,000

  Correct Answer: D

  The company's retained earnings increased by $200,000 during 1998 and dividends were paid of $300,000, therefore earnings had to be $500,000. The stock split has no effect on retained earnings.

• Question 2176:

  If a firm recognizes expenses before that dictated by accrual accounting, which of the following best describes the effects on income, total assets and retained earnings?

  Income Total Assets Retained Earnings

  I.Understated Understated Understated II.Understated Overstated Understated III.Overstated Understated Overstated IV.Understated Overstated Overstated

  A. III.

  B. IV.

  C. I.

  D. II.

  Correct Answer: C

  Income is understated. Hence, retained earnings and equity are understated. Hence, assets are understated.

• Question 2177:

  Stockholders' Equity is

  A. all of these answers

  B. the financial obligations of the company

  C. the rights to the assets of the business once the liabilities have been met

  D. assets plus liabilities

  Correct Answer: C

  The accounting equation shows us that the Assets (Own) are equal to the Liabilities (obligations) plus the Stockholders' Equity.

• Question 2178:

  On Jan. 1, DataCom prepays $3,000 rent for Mar. 1, June 1, and Sept.

  1. Under accrual basis accounting, what is the impact on the Feb. financial statements?

  A. $3,000 expense

  B. $1,000 decrease in net income

  C. no impact

  D. an increase to current assets of $1,000

  Correct Answer: B

  In order to match expenses with revenues for the period, the cost of prepaid insurance should be allocated to each accounting period. The asset value is decreased (credit), and an expense is recognized (debit), thus decreasing net income.

• Question 2179:

  Which of the following statements about the cash flow statement is/are true?

  I. The cash flow statement provides information on the liquidity of the firm.

  II. The income statement is more susceptible to management manipulation than the cash flow statement.

  III. The cash flow statement serves as a check on the inherent assumptions of the income statement.

  IV.

  The cash flow statement is based on actual events while the income statement is based on the allocation of the effects of these events over time.

  A.

  I and III

  B.

  I, II, III and IV

  C.

  I, II and III

  D.

  II and IV

  Correct Answer: B

  The cash flow statement cannot be manipulated as easily as the income statement since it is based on actual cash flows while income statement has to follow the accrual principle, which allocates non-cash expenses and revenues to the current and future periods, leaving open the avenue for earnings manipulation. For this reason, the cash flow statement acts as a check on the income statement.

• Question 2180:

  Tracy company reports the following in its statement of cash flows:

  Net Income $1,000 Depreciation and Amortization 350 Decrease (Increase) in Accounts receivable (10) Decrease (increase) in inventory 200 Decrease (increase) in prepaid expenses 80 Increase (decrease) in trade payables (300) Increase (decrease) in taxes payable 75 Cash Flow from operations 1,395

  If Tracy shows cost of goods sold of $2,050 on its income statement, cash paid to suppliers is

  A. $2,650

  B. $1,550

  C. $1,950

  D. $2,150

  Correct Answer: D

  $2,050 - $200 (purchased $200 less than used) + 300 (paid more to suppliers.