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

• Question 2191:

  Jones company earned $100,000 of pre-tax income in 1998, had $50,000 of pre-tax income in 1997, pays a 40% tax rate and has a dividend payout of 50%. What is the dividend amount declared by Jones Company in 1998?

  A. $45,000

  B. $40,000

  C. $30,000

  D. $50,000

  Correct Answer: C

  1998 Pre-tax income was $100,000 in 1998. The pre-tax income from the prior year has no relevance to the question. If the company pays a 40% tax rate, they are left with net income of $60,000 for the year. If the dividend payout rate is 50%, the company will declare $30,000 of dividends for 1998.

• Question 2192:

  Anti-dilutive securities are those that:

  A. are always included in the computation of the Diluted EPS.

  B. differentiate between a simple capital structure and complex capital structure.

  C. none of these answers.

  D. increase the earnings per share when assumed exercised.

  Correct Answer: D

  Anti-dilutive securities are always excluded from the computation of the Diluted EPS.

• Question 2193:

  If a company estimates that its expected return on pension plan assets will increase to 9.5% from 9.0% this would be considered ________.

  A. an extraordinary gain

  B. a change in accounting estimate

  C. a prior period adjustment

  D. a change in accounting principle

  Correct Answer: B

  Such a change is a change in accounting estimate and disclosure is required of the effect on both net income and income before extraordinary items for the current period.

• Question 2194:

  In computing EPS, the equivalent number of shares of convertible preferred stock is added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is preferred as to dividends, which amount should then be added as an adjustment to the numerator (earnings available to common shareholders)?

  A. Annual preferred dividend.

  B. Annual preferred dividend times (100% minus the income tax rate).

  C. Annual preferred dividend divided by the income tax rate.

  D. No adjustment should be made.

  E. Annual preferred dividend times the income tax rate.

  Correct Answer: A

  If a capital structure has convertible preferred stock with a dilutive effect on EPS, the "if-converted" method is used. This method assumes the conversion of the preferred stock occurred at the beginning of the accounting period or at issuance, if later. The annual preferred dividend is added back to earnings available to common shareholders.

• Question 2195:

  An employee's pension payments are based on his salary and length of service. He does not bear the risk of the pension size being affected by market performance. He is enrolled in the:

  A. defined benefits plan.

  B. defined contribution plan.

  C. defined pension plan.

  D. employee pension benefits plan.

  Correct Answer: A

  In a defined benefit pension plan, the retirement benefits are "predefined." The employer commits to providing the benefits regardless of the performance of the pension plan. Thus, in this plan, the risk of pension plan performance is borne by the employer and not the employee.

• Question 2196:

  The contents of the section of the annual report entitled "Management's Discussion and Analysis" (MDandA) are

  A. mandated by regulations of the SEC.

  B. mandated by pronouncements of the Financial Accounting Standards Board (FASB).

  C. reviewed by independent auditors.

  D. mandated by regulations of the Internal Revenue Service.

  E. none of these answers.

  Correct Answer: A

  The contents of the MDandA section are mandated by the SEC and not FASB.

• Question 2197:

  The Statement of Stockholders' Equity does not report

  A. any minimum pension liability.

  B. the investment of the owners in the firm.

  C. the various accounting adjustments that reflect selected market value changes in noncurrent assets.

  D. any cumulative impact on prior period earnings.

  E. the effect of exchange rate changes on certain foreign subsidiaries.

  Correct Answer: D

  Any cumulative impact on prior period earnings is reported net of tax after extraordinary items and discontinued operations on the income statement.

• Question 2198:

  Which of the following is true with respect to extraordinary items?

  I. Extraordinary items are recorded net of tax in income statement.

  II. Extraordinary items, by definition, are probable and unusual in nature.

  III.

  By definition, gains and losses from strikes are always extraordinary.

  IV By definition, gains and losses from sale of plant property and equipment are never extraordinary.

  A.

  I and IV, gains and losses from strikes are always extraordinary. IV By definition, gains and losses from sale of plant property and equipment are never extraordinary.

  B.

  I, III and IV

  C.

  II and IV

  D.

  I, II and III

  Correct Answer: A

  Extraordinary items are infrequent and unusual in nature. Strikes are not considered extraordinary.

• Question 2199:

  Depreciation expense for fixed assets is recorded:

  A. for each period the asset is in use

  B. when the asset is sold

  C. as a liability until the asset is sold

  D. at the end of each fiscal period during the asset's useful life

  Correct Answer: D

  Depreciation is the periodic allocation of the cost of a tangible, long-term asset over its estimated useful life, and therefore a period expense. This expense is recorded at the end of each fiscal period until the asset is fully depreciated or disposed of.

• Question 2200:

  Under the indirect method, cash flow from operating activities is computed by adjusting net income for all of the following, except

  A. noncash changes in fixed assets.

  B. nonoperating items included in net income.

  C. noncash revenues and expenses.

  D. noncash changes in operating assets.

  E. noncash changes in operating liabilities.

  Correct Answer: A

  Only operating assets are considered, not fixed assets.