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

• Question 2181:

  The following is referred to as the critical event in income determination:

  A. recording of revenues

  B. recording of changes in cash

  C. recording of changes in retained earnings during the period

  D. recording of expenses

  Correct Answer: A

  Recording revenues at the proper time is the critical event. Expenses are typically easier for companies to allocate to the proper periods. Expenses are more certain than revenues for most companies.

• Question 2182:

  Which of the following is not a financing activity in the statement of cash flows?

  A. repurchase of common stock

  B. issuance of new debt

  C. payment of interest on debt

  D. cash dividend

  Correct Answer: C

  The payment of interest on debt is not a financing activity.

• Question 2183:

  A firm has net sales of $6,000 in fiscal 1998, cash expenses (including taxes) of $2,800, and depreciation of $1,000. If accounts receivable increased in the period by $800, cash flows from operations equal ________.

  A. $2,400

  B. $3,200

  C. $3,400

  D. $4,200

  Correct Answer: A

  (6,000 - 2,800 - 800)

• Question 2184:

  The average age of a firm's depreciable assets is 9 years. The firm, subject to a tax rate of 40%, saves 20,000 each year due to depreciation expense. The total depreciation that the firm has accumulated is _______.

  A. 300,000

  B. 180,000

  C. 450,000

  D. 72,000

  Correct Answer: C

  Since tax savings from depreciation = (depreciation expense)*tax rate, one obtains depreciation expense = 20,000/0.4 = 50,000. Also, Average age = Accumulated depreciation/Depreciation expense. Hence, total accumulated depreciation = 9*50,000 = 450,000

• Question 2185:

  In the country of Merlenia, authorities require that tax reports and financial reports be identical. In Merlenia, there will be:

  A. no recognition of deferred taxes.

  B. a prevalence of LIFO accounting.

  C. no advantage to capitalizing a lease.

  D. no off-Balance-sheet financing.

  Correct Answer: A

  Deferred taxes arise out of temporary differences between tax reports and financial statements. To account for such differences under accrual accounting, deferred tax assets or liabilities are generated in accordance with the Matching Principle.

• Question 2186:

  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 equit y37,432 Average common equity 26,782 Average total liabilities 18,583

  In the above example, the firm's return on total equity equals ________.

  A. 8.31%

  B. 4.22%

  C. 6.57%

  D. 5.91%

  Correct Answer: C

  Return on total equity = Net income/average total equity. In the above example, 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, Return on total equity = 2,459/37,432 = 6.57%.

• Question 2187:

  Which of the following is used to calculate the actual adjustment for bad debt expense for the period?

  A. percent of accounts receivable

  B. percent of net sales

  C. aging

  D. all of these answers

  Correct Answer: B

  The aging and percent of Accounts Receivable methods calculate what the balance of the allowance account should be, however, percent of net sales method calculates the actual expense for the period.

• Question 2188:

  MacDonald Inc. reported net income of $300,000 for 1996. Changes occurred in several balance sheet accounts as follows:

  Equipment $25,000 increase Accumulated depreciation $40,000 increase Note payable $30,000 increase

  Additional information:

  During 1996, MacDonald sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.

  In December 1996, MacDonald purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.

  Depreciation expense for the year was $52,000.

  In MacDonald's 1996 statement of cash flows, net cash provided by operating activities is ________.

  A. $347,000

  B. $357,000

  C. $243,000

  D. $340,000

  E. $352,000

  Correct Answer: A

  To calculate cash flows from operating activities, net income will be adjusted for noncash items and working capital. Depreciation of $52,000 is added back to net income of $300,000 and the gain on sale of equipment of $5,000 is subtracted from net income. Therefore, the net cash inflow from operating activities is $347,000.

• Question 2189:

  All of the following statements are true except for:

  A. When inventory balances decrease, cash flows increase.

  B. When short-term debt increases, cash flows increase.

  C. When accounts receivable balances increase, cash flows increase.

  D. When accounts payable balances increase, cash flows increase.

  Correct Answer: C

  As accounts receivable balances increase, there is less income received as cash, therefore cash balances on the statement of cash flows will decrease.

• Question 2190:

  Beginning inventory of 50 units, purchased at $5 50 units purchased at $10 35 units purchased at $9 25 units sold at $15 70 units sold at $12 Tax rate = 40% Beginning LIFO reserve = $300

  Given the above, the net income using Average Cost method is ________.

  A. $279

  B. $224

  C. $381

  D. $249

  Correct Answer: A

  The Average Cost method first calculates the average value of each item in the inventory, including the purchases made during the period. In this case, the total inventory value at cost is 50*5 + 50*10 + 35*9 = $1,065. This is the value of (50 + 50 + 35) = 135 units. Therefore, average cost per unit = 1,065/135 = $7.89. Total COGS under Average Cost method is then $7.89*95 = $749.44. The total revenue equals 25*15 + 70*12 = 1,215, coming from a sale of 95 units. Thus, pretax income = 1,215 - 749.44 = $465.56. The after-tax income equals 465.56*0.6 = $279.