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

• Question 2241:

  Under the Percentage-of-completion method of recognizing contract revenue, common methods of estimation of completion include all of the following except:

  A. Ratio of units completed to total units expected to be completed.

  B. Ratio of costs incurred by expected total costs.

  C. Ratio of profits of the company year to date to expected profits for the year of the company.

  D. Ratio of units delivered to total units expected to be delivered.

  Correct Answer: C

  This method attempts to match expenses with revenues and profits. Revenues recognized would not be based on the expected profits for the company during the year.

• Question 2242:

  An end-of-period adjustment for depreciation of fixed assets is necessary

  A. proper statement of net income

  B. to be consistent with the matching principle

  C. all of these answers are correct

  D. to recognize the expense of using fixed assets

  Correct Answer: C

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

• Question 2243:

  Which of the following is/are TRUE?

  I. Accrual accounting follows the matching principle.

  II. In accrual accounting, revenues and cash flows are distinct concepts.

  III. In cash accounting, net income equals cash inflow.

  IV.

  In cash accounting, earnings equal net operating cash inflow.

  A.

  I, II and IV

  B.

  I, II,

  C.

  III and IV

  D.

  I, II and III

  Correct Answer: A

  In cash accounting, net income equals net operating cash inflow (total operating cash inflow - total operating cash outflow) and is the same as earnings.

• Question 2244:

  Which of the following is NOT an operating efficiency ratio?

  A. Asset turnover

  B. Equity turnover

  C. Sales-to-assets ratio

  D. Operating profit margin

  Correct Answer: D

  Operating efficiency ratios are a measure of how well the firm is utilizing its assets and capital. This utilization has a direct yardstick in terms of total sales generated. Hence, operating efficiency ratios express total sales as a fraction of assets or equity. On the other hand, Operating profit margin belongs to the group of operating profitability ratios.

• Question 2245:

  Which of the following best describes a statement of cash flows?

  A. A statement of cash flows details the cash inflows and outflows that are related to a company's operating, investing, and financing activities over a period of time.

  B. A statement of cash flows summarizes the financial position of a company at a given point in time.

  C. A statement of cash flows measures a company's financial performance over a specified period of time.

  D. A statement of cash flows reports changes over a period of time in component accounts that comprise the ownership of a firm.

  E. None of these answers.

  Correct Answer: A

  Under accrual accounting, net income does not typically equal net cash flow. While net income is important to identify, accrued income does not pay wages, payables, or dividends. Cash flows are important to identify since it is cash that repays loans, etc.

• Question 2246:

  A capital lease is recorded as ________.

  A. an asset and a liability

  B. a temporary asset

  C. an off-balance-sheet item

  D. a liability

  Correct Answer: A

  According to the GAAP, leases that transfer substantially all of the benefits and risks of the property to the lessee be treated as an asset acquisition and an assumption of liability. Hence, capital leases generate an asset and a liability.

• Question 2247:

  Which of the following are considered when applying generally accepted accounting principles.

  A. When income is recognized as earned.

  B. When expenses and losses accrue.

  C. How assets are measured.

  D. All of these answers are correct.

  E. When liabilities are incurred.

  Correct Answer: D

  The rules or standards of accounting determine such matters as how assets are measured, when liabilities are incurred, when income is recognized as earned, and when expenses and losses accrue.

• Question 2248:

  The balance sheet of firm A shows the following:

  Cash and Cash equivalents 386 Receivables 119 Inventories 204 Marketable securities 143 Short-term loans 649 Current portion of long-term debt 312

  The cash ratio of the firm equals ________.

  A. 0.55

  B. 0.82

  C. 1.82

  D. 0.63

  Correct Answer: A

  The cash ratio is the most conservative liquidity ratio calculated using only cash and marketable securities relative to current liabilities. Thus, Cash ratio = (cash + marketable securities)/current liabilities In this case, Cash ratio = (386+143)/ (649+312) = 0.55

• Question 2249:

  Where is Unearned Revenue reported in the financial statements?

  A. liability section of the balance sheet

  B. asset section of the balance sheet

  C. operating expense section of the income statement

  D. revenue section of the income statement

  Correct Answer: A

  Unearned revenue represents "services owed" and is reported in the liability section of the balance sheet.

• Question 2250:

  Two otherwise identical firms, A and B, have one difference. A has a higher interest expense than B,

  arising from its higher reliance on debt financing. All other accounting statistics, including net sales and

  expenses are equal for the two firms.

  The return on total capital for firm A will be __________ that for firm B.

  A. same as

  B. insufficient information to answer the question

  C. lower than

  D. higher than

  Correct Answer: D

  The return on total capital equals the net income before interest expense as a fraction of the average total capital invested. Therefore, if interest expenses were not tax deductible, the two firms would have exactly the same return on total capital. However, due to tax advantages of interest expenses, firm A will show a higher net income and hence, a higher return on capital.