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

• Question 2201:

  Each of the following are conditions that must be met if revenue is going to be recognized at the time of sale except

  A. seller has no significant obligations for future performance to directly effect resale of product.

  B. product return periods are less than or equal to 30 days from the time of sale.

  C. price is substantially fixed or determinable at the sale date.

  D. buyer pays the seller or is obligated to pay the seller (not contingent on resale).

  Correct Answer: B

  Revenue can be recognized at the time of sale as long as the product returns are reasonably estimated as well as several other conditions existing. There is no definitive number of days that make the recognition possible.

• Question 2202:

  Which of the following is/are true about Goodwill?

  I. It represents the amount paid for an acquired firm that cannot be identified with tangible assets.

  II. US GAAP prohibits capitalization of Goodwill.

  III.

  IRS does not allow amortization of Goodwill for tax purposes.

  A.

  I and II

  B.

  II only

  C.

  I, II and III

  D.

  I and III

  Correct Answer: D

  Under US GAAP, Goodwill generated during acquisitions are capitalized; it does not allow capitalization of internally generated Goodwill.

• Question 2203:

  When preparing a statement of cash flow, one of the relationships between balance sheet changes and cash flows can be summarized as

  A. decreases in liabilities represent net cash inflows.

  B. increases in liabilities represent net cash outflows.

  C. increases in assets represent net cash outflows.

  D. decreases in assets represent net cash outflows.

  Correct Answer: C

  Increases (decreases) in assets represent net cash outflows (inflows). If an asset increases, the firm must have paid cash in exchange. On the other hand, when a liability increases, the firm must have received cash in exchange.

• Question 2204:

  Which of the following transactions will impact a company's balance sheet?

  A. The payment of principal on a long-term loan

  B. The sale of new common stock

  C. Net income earned by a company

  D. All of these answers

  E. The purchase of equipment for cash

  Correct Answer: D

  All of these answers are correct. Net income earned by a company and the sale of common stock will affect the equity of a company; the purchase of equipment for cash will affect two assets accounts (cash and long-term assets); the payment of principal of a long-term loan will affect the liabilities of a company.

• Question 2205:

  In a given period, the firm's beginning gross investment is 4,000 and ending gross investment is 12,000. The accumulated depreciation at the beginning was 800 and the ending balance in this account was 900. The firm uses straight-line depreciation. The average age of the firm's assets at the end of the period is ________.

  A. 5 years

  B. 13.3 years

  C. 9 years

  D. 15 years

  Correct Answer: C

  Note that: Average age = Accumulated depreciation/Depreciation expense. Depreciation expense = 900800 = 100. Hence, Avg. age = 900/100 = 9 years.

• Question 2206:

  Which of the following is/are TRUE?

  I. The cash flow from operations are higher when expenses are capitalized.

  II. Total cash flows are higher when the expenses are capitalized.

  III. Capitalization of interest costs leads to higher net income.

  IV.

  Capitalization of interest costs is not allowed under GAAP.

  A.

  II, III and IV

  B.

  I, II, III and IV

  C.

  III and IV

  D.

  I and III

  Correct Answer: D

  While CFO is lower under expensing since the entire cash expense is charged against it, expensing leads to a lower total income, causing lower tax payments. Hence, total cash flows are higher under expensing.

• Question 2207:

  The Management Discussion and Analysis Section of the annual report ________.

  A. is optional but normally included in the annual report

  B. is required by the SEC only if the company has suffered from unfavorable trends or there are significant uncertainty concerning liquidity of the company

  C. is required by the SEC only if they have a qualified audit opinion

  D. is required by the SEC

  Correct Answer: D

  Companies with publicly traded securities have been required since 1968 to provide a discussion of earnings in the MDandA section.

• Question 2208:

  Under the indirect method, when reporting the cash flow from operations the starting point is

  A. the net changes of the operating asset and liability accounts.

  B. cost of goods sold.

  C. net income.

  D. all noncash expenses.

  E. cash collections.

  Correct Answer: C

  Under the indirect method the starting point is the period's net income.

• Question 2209:

  When a firm records a lease as a capital lease:

  A. Its working capital increases.

  B. Its current ratio decreases.

  C. Its debt-to-asset ratio increases.

  D. Its financial leverage ratio decreases.

  Correct Answer: B

  A capital lease is recorded as an asset as well as a liability. The next principal payment to be made on the lease is recorded as current liability (since it occurs within an operating cycle), thus decreasing the current ratio and working capital. The remaining portion is recorded as a long-term liability. Since total assets increase, the financial leverage ratio (assets/equity) increases.

• Question 2210:

  The Income Statement:

  I. reflects the current operating performance of the firm.

  II. indicates whether the firm is healthy and growing or not.

  III. explains the changes in assets, liabilities and equity of the firm.

  IV.

  is a snapshot of a firm's operations at a given time.

  A.

  I, II and IV

  B.

  II and III

  C.

  I, II, III and IV

  D.

  I only

  Correct Answer: D

  To assess the health and growth of a firm, one needs the cashflow statement in addition to the income statement to evaluate the liquidity and solvency of the firm. III is not true since the Income statement does not contain all the details which pertain to changes in assets and liabilities. Finally, (IV) is true of a balance sheet; an income statement displays some aspects of a firm's operations over a selected period.