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

• Question 2261:

  A firm's operating cash flow is overstated by 90. Its non-cash expenses were correctly stated, noncash revenues were overstated by 55 and a total of 35 went into reducing outstanding current debt. The firm's tax rate is 40%. Then, the firm's net income is ________.

  A. overstated by 55

  B. overstated by 20

  C. understated by 55

  D. correctly stated

  Correct Answer: D

  operating cash flow = net income + noncash expenses - non-cash revenues - cash reductions in operating accounts

• Question 2262:

  Which of the following could increase outstanding capital stock?

  A. Conversion of bonds.

  B. All of these answers.

  C. The exercise of stock options.

  D. The exercise of warrants.

  E. The payment of stock dividends.

  Correct Answer: B

  All of these answers would cause a firm's capital stock to increase. While the exercise of stock options or warrants offers a price to the buyer that is more favorable than the firm's current market price, these still result in the issuance of new shares. Likewise, the conversion of bonds to stock swaps debt for equity and the payment of stock dividends means that the firm is issuing new shares.

• Question 2263:

  A firm has net total sales of 16,000 and administrative cash expense of 4,500. It paid taxes in the amount of 2,300 and had an increase in accounts payable of 400. The depreciation expense was estimated at 1,200. Then, the firm's operating cash flow was ________.

  A. 9,600

  B. 8,000

  C. 9,200

  D. none of these answers

  Correct Answer: A

  The increase in accounts payable implies that some of the operating expenses were on credit and did not cause a cash outflow. Therefore, this increase must be added to the net sales. Further, depreciation should be ignored since it is a non- cash expense and its effect on taxes is already impounded in the taxes of 2,300. Hence, the total operating cash flow = 16,000 + 400 - 4,500 - 2,300 = 9,600

• Question 2264:

  In a statement of cash flows done using the indirect method all of the following would be included as cash flows from investing activities except for:

  A. purchase of fixed assets.

  B. sale of fixed assets.

  C. all would be included as cash flows from investing activities.

  D. gain on sale of equipment.

  Correct Answer: D

  Gains and losses on the sale of fixed assets are included in cash flows from operating activities. The amount included in the investing activities area is the amount of the asset on the books of the company.

• Question 2265:

  Which of the following could cause a firm's equity position to be weaker than is reflected in the balance sheet.

  A. All of these answers.

  B. Holding held-to-maturity securities in a portfolio with non-amortized discounts.

  C. Holding available-for-sale securities in a portfolio that have unrealized losses.

  D. None of these answers.

  E. Holding trading securities in a portfolio with unrealized gains.

  Correct Answer: C

  Evaluating available-for-sale securities in a portfolio can be challenging to the analyst. A firm might hold a variety of securities in a portfolio for which the unrealized gains of one or more securities offsets the unrealized losses of other securities. While these values offset each other, the security that has an unrealized loss might be a high-grade investment that is not subject to much fluctuation. On the contrary, the securities that have unrealized gains might be highly volatile securities that were at all time highs at the close of the firm's fiscal period but will these gains be sustainable? It is conceivable then that the firm's equity position might be a bit weaker that the balance sheet suggests.

• Question 2266:

  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 financing?

  A. $6,000

  B. ($17,000)

  C. $3,000

  D. ($14,000)

  Correct Answer: D

  ($14,000) = ($10,000) for repurchase of stock and ($4,000) for payment of dividend

• Question 2267:

  If a firm's net income after dividends is greater than zero, then

  I. its equity increases.

  II. its retained earnings increase.

  III. its liabilities decrease.

  IV.

  its stock price increases.

  A.

  I, II and IV

  B.

  I and IV

  C.

  I and II

  D.

  II only

  Correct Answer: C

  The income not paid out as dividends becomes part of retained earnings, which is a component of equity. A firm's market value is not determined solely by its current book value but expected future earnings. If the current period's income falls short of expectations, then the stock price will fall even if nothing else changes simply because the unrealized part of the income was factored into the original price. A further complication arises if the market interprets the fall in income as an unfavorable signal about future earnings. Thus, while book value of the stock increases, the market value could increase or decrease.

• Question 2268:

  The following is true about the price earnings ratio A. it is the ratio between the company's current market value and its earnings per share

  B. none of these answers

  C. the ratio is calculated based on the earnings per share from the past year

  D. stocks with price earnings ratios of 25 or less are considered to be underpriced

  Correct Answer: A

  PE ratio is calculated based on expected earnings per share and a ratio of less than 5 to 8 makes a stock appear underpriced.

• Question 2269:

  According to U.S. GAAP, the format of the income statement

  A. must include footnotes which detail particular income statement sections.

  B. must not vary across different industries.

  C. must include an "operating expenses" section.

  D. must be identical in the reporting of equity in earnings of affiliates.

  E. is not specified.

  Correct Answer: E

  U.S. GAAP do not specify the format of the income statement. Actual formats vary across firms, especially in the reporting of equity in earnings of affiliates, and nonoperating income and expense.

• Question 2270:

  According to SFAS 95, cash and cash equivalents includes

  A. bank accounts, U.S. Treasury Bills and fixed income securities.

  B. risk-free assets with original maturities of 90 days or less.

  C. risk-free assets with original maturities of 30 days or less.

  D. bank accounts, U.S. Treasury Bills and marketable securities.

  E. only bank accounts.

  Correct Answer: B

  Bank accounts, U.S. Treasury Bills, and similar assets qualify.