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

• Question 2281:

  A firm's financial statements reveal the following data:

  operating profit margin 41% interest expense ratio 4.2% debt-to-equity ratio 0.45 total asset turnover 1.6 tax rate 45%

  The firm's ROE equals ________.

  A. 28.91%

  B. 48.97%

  C. 19.68%

  D. 33.23%

  Correct Answer: B

  ROE = Net income/Equity

  Now, Net Income = (Operating profits - interest expense)*(1 - tax rate)

  Therefore, ROE = (Operating profits/equity - interest expense/equity) *(1 - tax rate) interest expense/equity

  = (interest expense/assets)*(assets/equity) = interest expense ratio*(1+debt/equity) = 4.2%*(1+0.45) =

  6.09% Operating profits/equity = (Operating profits/sales)*(sales/assets)*(assets/equity) = 41%*1.6*1.45 =

  95.12%

  Thus, ROE = (95.12% - 6.09%)*(1-45%) = 48.97%

• Question 2282:

  Which of the following methods is the best way of conducting a comparative financial statement analysis?

  A. Comparing of a company's balance sheet to its income statement.

  B. All of these methods are equally good.

  C. Break-even analysis.

  D. An index-number trend series analysis.

  E. A cash flow forecast.

  Correct Answer: D

  An index-number trend series analysis is quite useful when comparing financial statements that cover more than two or three periods with a year-to-year change analysis. The year-to-year change analysis method can be cumbersome when attempting to compare three or more periods.

• Question 2283:

  Regarding financial accounting for public companies, the role of the SEC as currently practiced is to

  A. make rules and regulations regarding filings with the SEC but not to regulate annual or quarterly reports to shareholders.

  B. develop and promulgate most generally accepted accounting principles.

  C. make rules and regulations pertaining more to disclosure of financial information than to the establishment of accounting recognition and measurement principles.

  D. none of these answers.

  E. regulate financial disclosures for corporate, state, and municipal reporting.

  Correct Answer: C

  The SEC has authority to regulate external financial reporting. However, its role is to promote disclosure rather than to exercise its power to establish accounting recognition and measurement principles. Its objective is to allow the accounting profession (through FASB) to establish accounting principles.

• Question 2284:

  Which of the following is/are true about pension plans?

  I. In a defined benefit plan, the investment risks are borne by the employer.

  II. In a defined contribution plan, the investment risks are borne by the employee.

  III.

  The employee has investment flexibility with defined contribution plan.

  A.

  I and II

  B.

  II only

  C.

  I, II and III

  D.

  I and III

  Correct Answer: C

  In a defined benefit contribution plan, the employee makes definite contributions to the pension plan from the regular salary. Investment of these contributions is at the discretion of the employee and the size of the benefits paid out depends upon the total contributions made and the fund performance. Thus, in this plan, the risk of pension plan performance is borne by the employee and not the employer.

• Question 2285:

  On Jan 1, a firm had 700 stocks outstanding. On May 1, it issued 300 more shares. On October 1, it repurchased 100 shares. If the firm's net income was 12,000 and it paid a preferred dividend of 1,400, its reported EPS is ________.

  A. 12

  B. 10.6

  C. 11.77

  D. 12.1

  Correct Answer: D

  For a simple capital structure, EPS = (Net Income - Preferred stock dividends)/weighted # of common shares To calculate the weighted # of shares, note that 600 shares remained outstanding for 12 months, 100 shares for 9 months and 300 shares for 8 months. Therefore, weighted shares = 12/12*600 + 9/12*100 + 8/12*300 = 875. EPS = (12,000 - 1,400)/875 = 12.11.

• Question 2286:

  Tasty Food, Inc.'s statements have overstated accounts payable by 400 and understated the accounts receivables by 225. Then, which of the following is/are true?

  I. Its income is correctly stated.

  II. Its income is overstated by 175.

  III. Its current assets are overstated by 225.

  IV.

  Its operating cash flows are overstated by 175.

  A.

  II, III and IV

  B.

  I and III

  C.

  I and IV

  D.

  II and IV

  Correct Answer: C

  Current assets are understated by 225. The reported income is not affected since the errors are in the balance sheet items. The operating cash flow is overstated by 400-225=175. Note that current liability is overstated by 400.

• Question 2287:

  A firm uses LIFO for inventory costing. The beginning inventory balance of the firm was 700. During the

  period, it purchased inventory worth 320 and sold goods worth 270. The market value of the inventory at

  the end of the period was 650.

  The total inventory expense during this period was ________.

  A. 370

  B. 270

  C. 320

  D. 340

  Correct Answer: A

  In this problem, you have to recognize the fact that inventory is valued at the end of an accounting period at the lower of cost or market (LCM). The write-down that occurs if the market value is lower than cost is charged to the income. In this case, the COGS equals 270 (given). If the LCM were ignored, the ending inventory would have been valued at 700 + 320 - 270 = 750. However, due to the lower market value of 650, inventory gets written down to 650 and the loss of 100 in inventory is charged to income. Thus, the total inventory expense equals 270 + 100 = 370.

• Question 2288:

  At the end of a fiscal period, any revenue that has been earned but not received should be credited to an appropriate:

  A. expense account

  B. revenue account

  C. liability account

  D. asset account

  Correct Answer: B

  Revenue should be recognized in the period in which it is earned and is credited to the appropriate revenue account.

• Question 2289:

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

  A. When income is recognized as earned.

  B. How assets are measured.

  C. All of these answers are correct.

  D. When expenses and losses accrue.

  E. When liabilities are incurred.

  Correct Answer: C

  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 2290:

  A common size balance sheet shows all quantities as a percentage of ________ while an income statement uses ___________ as the base amount.

  A. sales, assets

  B. assets, sales

  C. equity, sales

  D. assets, equity

  Correct Answer: B

  A common size balance sheet shows all quantities as a percentage of assets while an income statement uses sales as the base amount.