CFA Institute CFA-LEVEL-1 Online Practice Questions and Exam Preparation

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2221:

  Which of the following is not a current asset?

  A. Accumulated Depreciation
  B. Allowance for Uncollectible Accounts
  C. Notes Receivable
  D. Prepaid Insurance
  A. Accumulated Depreciation

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  Explanation

  Accumulated Depreciation is a contra account to the fixed asset account(s), which are reported in the ling-term asset section of the balance sheet.

• Question 2222:

  Brokers who knowingly or recklessly engage in excessive trading in customers' accounts are known to be ________.

  A. over-selling
  B. mixing
  C. churning
  D. none of these answers
  E. shingling
  C. churning

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  Explanation

  Brokers and dealers are held to a higher standard of care than the average person. They are liable for knowingly or recklessly engaging in excessive trading in customers' accounts, (churning); for accepting funds when they are insolvent, for manipulating the market and for fraud under the shingle theory.

• Question 2223:

  Exports of goods (merchandise) and services minus the imports of goods and services equals ________.

  A. current account
  B. balance of merchandise trade
  C. balance on current accounts
  D. balance on goods and services
  D. balance on goods and services

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  Explanation

  When the balance of service exports and imports are added to the balance of merchandise trade the balance on goods and services is obtained.

• Question 2224:

  Following is a graph of the Industry Life Cycle with the names of the phases omitted.

  

  Using the graph above, which of the following choices is INCORRECT?

  A. The return on equity (ROE) on new projects is likely greater than ke for firms in Phase B.
  B. The infinite period dividend discount model (DDM) works well for valuing firms in Phases C and D.
  C. In general, profit margins are lower in Phase A than in Phase B.
  D. For most companies, Phase C lasts the longest.
  D. For most companies, Phase C lasts the longest.

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  Explanation

  For most companies, Phase D, the Stabilization and Market Maturity Phase, lasts the longest. Phase C is the Mature Growth Phase. The other statements are true. During Phase B, the Rapid Accelerating Growth Phase, it is likely that the firm is earning a higher return on new projects than the required rate of return. During this phase, investors likely prefer for the firm to reinvest rather than pay dividends. The infinite period DDM works well for valuing firms in Phase C, the Mature Growth Phase, and Phase D, the Stabilization and Market Maturity Phase. Remember that the infinite period DDM is most useful for a company with the following assumptions: Phase A, the Pioneering Phase, is the start-up phase. Here, the market is small and firms incur major development costs. Sales growth is low and profit margins may be negative. In Phase B, the Rapid Accelerating Growth Phase, markets develop and demand grows exponentially. Competition is low and sales growth and profit margins are very high

• Question 2225:

  If a new option contract is listed on an option exchange and only one trader buys one contract in the first day, the open interest after that day is:

  A. two contract.
  B. zero contract.
  C. cannot be determined with this information.
  D. one contract.
  D. one contract.

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  Explanation

• Question 2226:

  Which type of investment company may charge a redemption fee?

  A. none of these answers
  B. both of these answers
  C. open-end investment company
  D. closed-end investment company
  C. open-end investment company

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  Explanation

  An open-end investment company (mutual fund) sells shares with or without a sales charge (load) and redeems shares with or without redemption fees.

• Question 2227:

  Bond X and Bond Y were issued at a premium to par value three years ago. Bond X matures in five years, and Bond Y matures in ten years. Both bonds carry the same credit rating. Bond X has a coupon of 7. 25%, and Bond Y has a coupon of 8.00%. Currently the required yield for both bonds is 7. 60%. Determine whether each bond is currently priced at a premium or discount to par value.

  A. Both bonds are priced at a premium.
  B. Bond X is priced at a premium, and Bond Y is priced at a discount.
  C. Bond X is priced at a discount, and Bond Y is priced at a premium
  C. Bond X is priced at a discount, and Bond Y is priced at a premium

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  Explanation

• Question 2228:

  Regarding the net present value of a replacement decision, which of the following statements is false?

  A. The present value of the after-tax cost reduction benefits resulting from the new investment is treated as an inflow.
  B. The present value of depreciation expenses on the new equipment, multiplied by the tax rate, is treated as an inflow.
  C. An increase in net working capital is treated as an outflow when the project begins and as an inflow when the project ends.
  D. Any loss on the sale of the old equipment is multiplied by the tax rate and is treated as an outflow at t = 0.
  E. The after-tax market value of the old equipment is treated as an inflow at t = 0.
  D. Any loss on the sale of the old equipment is multiplied by the tax rate and is treated as an outflow at t = 0.

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  Explanation

  Since the old equipment is sold at a loss which reduces taxable income, a tax savings is realized and is deducted from the investment outlay.

• Question 2229:

  Aggregate depreciation expense tends to

  A. decrease during recessions.
  B. always decrease.
  C. never decrease.
  D. decrease during the peak of the business cycle.
  E. decrease during the economic recoveries.
  C. never decrease.

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  Explanation

  Because depreciation expense is an estimate of fixed cost expense related to total fixed assets, it tends never to decrease because total fixed assets for a large number of firms (such as those in the SandP 400) tend never to decrease. The relevant question is by how much depreciation expense increases.

• Question 2230:

  Procedures for compliance with Standard I include ________.

  A. activities relating to interns and people under contract
  B. keep informed
  C. when you suspect illegal activity, determine legality
  D. when you suspect illegal activity, dissociate from that activity
  E. all of these answers
  F. maintain current files
  G. review procedures
  E. all of these answers

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  Explanation

  Members should maintain current reference copies of applicable statutes, rules and regulations in a readily accessible manner. Members should establish a procedure by which employees are kept informed about changes in applicable laws. Members should review procedures on a regular basis to ensure that they reflect current law and provide adequate guidance. When a member suspects illegal activity is being conducted, the member should consult counsel to determine the conduct's legality and dissociate from the conduct if there are reasonable grounds to believe that it is illegal. This applies to the activities of interns or contractors as well.