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

• Question 2211:

  Profit margin is a ratio that:

  A. shows the return on net sales

  B. is calculated as net sales divided by operating expenses

  C. yields the company's financial position at a point in time

  D. compares total assets to net sales

  Correct Answer: A

  Profit margin, also called return on net sales, is calculated by dividing net income by net sales. This ratio measures the average portion of each dollar of revenue that ends up as profit.

• Question 2212:

  A liability can be recognized when

  A. an obligation exists to make a future payment based on a past event

  B. any time a future payment is due

  C. only when the amount is certain

  D. all of these answers are correct

  Correct Answer: A

  The amount need not be certain and some future payments such as wages to be paid in the future may not be reported as liabilities.

• Question 2213:

  Which of the following would occur prior to the completion of a long-term contract when using the completed-contract method as opposed to the percentage-of-completion method?

  A. A firm's current period income tax liability would be lowered.

  B. A firm's current period profits would be greater.

  C. None of these answers.

  D. All of these answers.

  E. A firm's current period revenues would be greater.

  Correct Answer: A

  A firm's income tax liability is lower under the competed-contract method because revenues and related income taxes on profits are deferred until the contract is completed. The percentage-of- completion method would recognize revenues earlier and would generate higher current period income tax liabilities.

• Question 2214:

  Most components of the balance sheet are reported at

  A. historical cost plus allowance for inflation.

  B. fair market value.

  C. historical cost.

  D. replacement value.

  Correct Answer: C

  Most components of the balance sheet are reported at historical cost, that is, the exchange price at their acquisition date.

• Question 2215:

  Holiday Corp. holds 10,000 shares of its $10 par value common stock as treasury stock reacquired in 1994 for $120,000. On December 12, 1996, Holiday reissued all 10,000 shares for $190,000. Under the cost method of accounting for treasury stock, the reissuance resulted in increasing

  A. additional paid-in capital by $70,000.

  B. treasury stock by $100,000.

  C. capital stock by $100,000.

  D. retained earnings by $70,000.

  E. gain on sale of investments by $70,000.

  Correct Answer: A

  Under the cost method, treasury stock is decreased by $120,000, cash is increased by $190,000 and the difference (which is like a gain) is reported as an increase in additional paid-in capital. Accounting rules do not allow a firm to record a gain or loss when it buys back treasury stock because the transaction is viewed as an equity transaction.

• Question 2216:

  All of the following are components of Shareholder's equity EXCEPT ________.

  A. par value

  B. dividends paid

  C. retained earnings

  D. capital contributed in excess

  Correct Answer: B

  Dividends declared are part of equity.

• Question 2217:

  Which of the following best describes an income statement?

  A. It reports revenues and expenses for a specific accounting period.

  B. It reports the amount and composition of assets and liabilities for a specific accounting period.

  C. None of these answers.

  D. It reports investment activities for a specified accounting period.

  E. It reports cash receipts and cash disbursements for a specific accounting period.

  Correct Answer: A

  An income statement measures a company's financial performance between balance sheet dates and, hence, reflects a period of time. It lists revenues, expenses, gains, and losses of a company over a time period.

• Question 2218:

  New Gestalt, Inc., a software firm had a net income of 1.7 million last year. It has 200,000 common shares and 300,000 convertible bonds with face value of 100 outstanding. The convertible bonds carry a coupon of 4% and can be converted one-for-one. The average stock price last year was 39 and the maximum price was 57. The effective interest rate on the convertible debt is 8%. New Gestalt issued 100,000 preferred shares with face value 100 and a coupon of 5% on March 31st of last year. Assume the convertible bonds are dilutive and that New Gestalt faces a 30% tax rate. Given the above, if New Gestalt had 300,000 warrants with a strike of 36 outstanding instead of the convertible bonds, the number of shares used in Diluted EPS would equal ________.

  A. 200,000

  B. 223,077

  C. 312,648

  D. 500,000

  Correct Answer: B

  Since the strike price of 36 on the warrants is less than the average stock price of 39, the warrants are dilutive. Using the Treasury stock method, the additional shares due to warrant exercise = 300,000*(1 36/39) = 23,077. Total number of shares used in Diluted EPS = 200,000 + 23,077 = 223,077.

• Question 2219:

  The portion of the supplies inventory that has been consumed during the fiscal period is classified as

  A. an expense

  B. an increase in retained earnings

  C. a liability

  D. an asset

  Correct Answer: A

  In accordance with the matching rule, the amount of an asset such as supplies that has been consumed during the accounting period must be recorded and classified as an expense for the period.

• Question 2220:

  The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.

  Net Income $50,000 Provision for bad debts $2,000 Increase in Inventory $1,000 Increase in accounts payable $2,000 Purchase of new equipment $15,000 Sale of equipment for $10,000 gain $20,000 Depreciation expense $5,000 Repurchase of common stock $10,000 Payment of dividend $4,000 Interest payment $3,000

  What is net cash flow from investing?

  A. $10,000

  B. ($15,000)

  C. ($5,000)

  D. $5,000

  Correct Answer: D

  Outflow of $15,000 for new equipment and $20,000 inflow from sale.