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

• Question 2231:

  Which of the following is/are TRUE?

  I. Losses due to union strike at a plant are classified as extraordinary items.

  II. Unusual and infrequent items appear as part of income from continuing operations.

  III. Gains from debt retirement are classified as extraordinary items.

  IV. The loss from the sale of a portion of business segment is included in income from continuing operations.

  A. II and III

  B. I and IV

  C. I and II

  D. III and IV

  Correct Answer: D

  Extraordinary items are those items are those which are unusual in nature and infrequent in occurrence. Extraordinary items appear segregated from the income from continuing operations on the Income Statement. Therefore, II is false. III is true under current GAAP. Losses due to a strike or the sale of a portion of a business segment are considered unusual but not infrequent and hence, do not qualify as extraordinary items.

• Question 2232:

  Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting periods.

  A. To reduce the federal income tax liability.

  B. To adhere to the concept of conservatism.

  C. To aid management in the decision-making process.

  D. To match the costs of production with the revenues as earned.

  E. To maximize accounting income.

  Correct Answer: D

  If costs benefit more than one accounting period, they should be systematically and rationally allocated to all periods benefited. Matching refers to the process of recognizing expenses over the periods where revenues have benefited from these expenses.

• Question 2233:

  Marine Corp. uses the direct method to prepare its statement of cash flows. Marine's trial balance at December 31, 1996 and 1995 are as follows:

  Dec. 31, 1996 Dec. 31, 1995

  Debits:

  Cash $35,000 $32,000 Accounts receivable 33,000 30,000 Inventory 31,000 47,000 Property, plant and equipment1 00,000 95,000 Unamortized bond discount 4,500 5,000 Cost of goods sold250,000 380,000 Selling expenses 141,500172,000 General and administrative expenses 137,000 151,300 Interest expense 4,300 2,600 Income tax expense 20,400 61,200 Total debits $756,700 $976,100

  Allowance for doubtful accounts $1,300 $1,100 Accumulated depreciation 16,500 15,000 Trade accounts payable 25,000 17,500 Income taxes payable 21,000 27,100 Deferred income taxes 5,300 4,600 8% callable bonds payable 45,000 20,000 Common stock 50,000 40,000 Additional paid-in capital 9,100 7,500 Retained earnings 44,700 64,600 Sales 538,800 778,700

  Total credits $756,700 $976,100

  Marine purchased $5,000 in equipment during 1996. Marine allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses.

  What amount should Marine report in its statement of cash flows for the year ended December 31, 1996 for cash paid for interest?

  A. $1,700

  B. $3,800

  C. $3,600

  D. $4,300

  E. $4,800

  Correct Answer: B

  Interest expense is $4,300 and was all paid since there is no interest payable account. However, since there is an account for unamortized bond discount, the reduction of $500 between the two years represents discount amortization, a noncash item. Therefore $4,300 less $500 (or $3,800) was paid in cash for interest.

• Question 2234:

  A firm has long-term assets worth 3,812 and total assets worth 5,937. It has a total equity of 3,934 and long term debt of 879. The firm's current ratio equals ________.

  A. 1.32

  B. 0.92

  C. 1.03

  D. 1.89

  Correct Answer: D

  The firm's current assets equal 5,937 - 3,812 = 2,125. The total liabilities equal total assets - total equity = 5,937 - 3,934 = 2,003. Thus, the current liabilities equal 2,003 - 879 = 1,124. The current ratio is then equal to current assets/current liabilities = 2125/1124 = 1.89

• Question 2235:

  Depreciation expense for fixed assets is recorded

  A. for each period the asset is in use

  B. as a liability until the asset is sold

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

  D. when the asset is sold

  Correct Answer: C

  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 2236:

  The Income Summary account

  A. is used to facilitate the closing process

  B. all of these answers are correct

  C. is a temporary account D. should have a zero balance at period-end

  Correct Answer: B

  The Income Summary account is a temporary account created especially for the closing process and is used only for flowing adjustments and closing entries through.

• Question 2237:

  The following data are available for a firm for a given year:

  Net Sales 21,896 Sales and marketing expenses 4,346 Administrative expenses 2,143 COGS 10,084 Depreciation 967 Interest expense 573 Tax rate35% Dividends paid 3,445 Preferred Dividends 897 Average total equity 37,432 Average common equity 26,782 Average total liabilities1 8,583

  In the above example, the firm's operating profit margin equals ________.

  A. 0.24

  B. 0.35

  C. 0.18

  D. 0.54

  Correct Answer: A

  Operating Profit Margin = 21,896 - 10,084 - 4,346 - 2,143 = 5,323. (Earnings before depreciation, interest, and taxes as a % of sales; EBDIT). Therefore, Operating Profit Margin = 5,323/21,896 = 0.24.

• Question 2238:

  A firm's financial statements reveal the following data:

  interest coverage ratio 3.6X

  interest expense rate 7.2% depreciation 678 total assets 10,946 total asset turnover 1.46

  The firm's operating margin equals ________.

  A. 13.84%

  B. 23.18%

  C. 21.99%

  D. 25.93%

  Correct Answer: C

  Interest Coverage = EBIT/interest expense Operating Profit Margin = EBDIT/Net sales Interest expense rate = interest expense/total assets Total Asset turnover = sales/total assets Therefore, interest expense = 7.2%*10,946 = 788 and EBIT = 3.6*788 = 2,837. So EBDIT = EBIT + depreciation = 2,837 + 678 = 3,515. Also, net sales = 1.46*10,946 = 15,981. This gives Operating Profit Margin = 3,515/15,981 = 21.99%.

• Question 2239:

  Under what condition would a firm report marketable securities as a long-term asset?

  A. None of these answers.

  B. When funds are set aside for a specific long-term purpose such as plant expansion.

  C. When the value of a firm's investment in marketable securities is less than cost.

  D. All of these answers.

  E. When a firm maintains excess trading securities.

  Correct Answer: B

  A firm may maintain funds invested in marketable securities that are earmarked for plant expansion, sinking fund payments, or other long-term uses. In these situations many firms would report this portion of its cash, or cash equivalents as long-term because these invested funds are not available in the daily operation of the business.

• Question 2240:

  The following data are available for a firm for a given year:

  Net Sales 21,896 Sales and marketing expenses 4,346 Administrative expenses 2,143 COGS 10,084 Depreciation 967 Interest expense 573 Tax rate 35% Dividends paid 3,445 Preferred Dividends 897 Average total equity 37,432 Average common equity 26,782 Average total liabilities 18,583

  The firm's gross profit margin equals ________.

  A. 0.45

  B. 0.39

  C. 0.24

  D. 0.54

  Correct Answer: D

  Gross Profit = 21,896 - 10,084 = 11,812 and

  Gross Profit margin = 11,812/21,896 = 0.54 = 54%.