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

• Question 2221:

  A ratio that measures the average portion of each dollar of revenue that results in profit is

  A. profit margin

  B. both of these answers are correct

  C. neither of these answers is correct

  D. return on sales

  Correct Answer: B

  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 2222:

  All of the following are typically fixed expenses except for ________.

  A. raw materials

  B. rent

  C. insurance

  D. property taxes

  Correct Answer: A

  Fixed expenses are costs that are relatively constant and costs that would be difficult to match directly with units being sold.

• Question 2223:

  An end-of-period adjustment for depreciation of fixed assets is necessary: A. to recognize the expense of using fixed assets

  B. all of these answers

  C. proper statement of net income

  D. to be consistent with the matching principle

  Correct Answer: B

  An adjustment for depreciation expense matches expenses with revenues for the period, thus contributing to correct statement of net income for the period.

• Question 2224:

  The completed contract method

  A. may understate gross profit.

  B. generally must be used when no contract exists.

  C. cannot be used for short-term contracts.

  D. may be used for long-term contracts at the option of the company.

  E. recognizes revenues and costs in proportion to the work completed.

  Correct Answer: B

  The completed contract method recognizes revenues and expenses only at the end of the contract. It must be used when any one of the conditions required for use of the percentage-of-completion method is not met.

• Question 2225:

  In preparing its cash flow statement for the year ended December 31, 1998, Roman Co. collected the following data: Gain on sale of equipment $6,000 Proceeds from sale of equipment 10,000 Purchase of A.S. Inc. bonds (par value $200,000)180,000 Amortization of bond discount2,000 Dividends declared 45,000 Dividends paid 38,000 Proceeds from sale of treasury stock (carrying amount of $65,000)75,000

  In its December 31, 1998 statement of cash flows, what amount should Roman report as net cash used in investing activities?

  A. $194,000

  B. $188,000

  C. $170,000

  D. $174,000

  E. $176,000

  Correct Answer: C

  Investing activities include the acquisition and disposal of all long-term assets. Thus, the proceeds from sale of equipment of $10,000 and purchase of bonds of $180,000 result in a net use of cash of $170,000 from investing ($10,000- 180,000).

• Question 2226:

  Miller Mining, a calendar-year corporation, purchased the rights to a copper mine on July 1, 1996. Of the total purchase price, $2,800,000 was appropriately allocated to the copper. Estimated reserves were 800,000 tons of copper. Miller expects to extract and sell 10,000 tons of copper per month. Production began immediately. The selling price is $25 per ton. Miller uses percentage depletion (15%) for tax purposes. To aid production, Miller also purchased some new equipment on July 1, 1996. The equipment cost $76,000 and had an estimated useful life of 8 years. After all the copper is removed from the mine, however, the equipment will be of no use to Miller and will be sold for an estimated $4,000. If sales and production conform to expectations, what is Miller's depletion expense on this mine for financial accounting purposes for the calendar year 1996?

  A. $420,000

  B. $215,400

  C. $105,000

  D. $210,000

  E. $430,800

  Correct Answer: D

  Depletion expense is based on the units-of-production method. Based on the estimates, the depletion charge per ton is $3.50 ($2,800,000 / 800,000 tons). Since 10,000 tons are extracted per month and there are 6 months of operations for 1996, the depletion expense is $210,000 ($3.50 per ton X 10,000 tons X 6 months).

• Question 2227:

  The following information is from the financial statements of Complex Capitalists for 1997 and 1998:

  Dec. 31, 1997 - 1 million common shares outstanding, capital structure all-equity

  March 31, 1998 - issued 200,000 common shares.

  May 31, 1998 - issued 800,000 warrants exercisable at a strike of 35.

  The stock price on Dec. 31, 1998 was 37. The average price during 1998 was 34 and the maximum price

  was 39. How many shares will the basic EPS computation for 1998 use?

  A. 2.0 million

  B. 1.15 million

  C. 1.2 million

  D. 1.617 million

  Correct Answer: B

  Basic EPS will ignore the warrants and calculate the weighted number of common stock outstanding for 1998. The newly issued share were outstanding for 9 months and hence weighted # of shares used = 1 million + 3/4*200,000 = 1.15 million.

• Question 2228:

  A firm's quick ratio equals 1.31 and its cash ratio equals 1.19. If the firm has receivables of 693, its current liabilities equal ________.

  A. 8,129

  B. 4,693

  C. 5,775

  D. 7,926

  Correct Answer: C

  The definitions of the two ratios are:

  Quick ratio = (cash + marketable securities +receivables)/current liabilities

  Cash ratio = (cash + marketable securities)/current liabilities

  Thus, (Quick ratio - Cash ratio) = receivables/current liabilities.

  Therefore, 1.31 - 1.19 = 0.12 = 693/current liabilities. Solving, we get current liabilities = 693/0.12 = 5,775.

• Question 2229:

  When a plant asset is sold for more than its book value:

  A. cash received plus accumulated depreciation plus gain on disposal equals the original cost.

  B. cash received plus accumulated depreciation minus gain on disposal equals the original cost.

  C. book value of the asset minus gain on disposal equals cash received.

  D. original cost minus accumulated depreciation equals cash received plus gain on disposal.

  Correct Answer: B

  Gain or loss on disposal of a fixed asset is calculated by subtracting the book value (Original cost Accumulated Depreciation) from the cash received.

• Question 2230:

  Which of the following is an operating cash flow?

  A. Dividends paid out to shareholders.

  B. Dividends received on investments in stocks.

  C. All of these answers.

  D. Cash used to replace the machine tool used in operational activities.

  Correct Answer: B

  Dividends received on investments in stocks are classified as operating cash flows while dividends paid out to shareholders are financing cash flows. Cash used to replace the machine tool used in operational activities is an investing cash flow.