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

• Question 2291:

  In its 1996 income statement, Coopers Co. reported income before income taxes of $300,000. Coopers estimated that, because of permanent differences, taxable income for 1996 would be $280,000. During 1996, Coopers made estimated tax payments of $50,000, which were charged to income tax expense. Coopers is subject to a 30% tax rate. What amount should Coopers report as income tax expense?

  A. $84,000

  B. $40,000

  C. $34,000

  D. $90,000

  E. $50,000

  Correct Answer: A

  Income tax expense is the sum of current income tax and deferred tax expense. There is no timing difference in this case and, therefore, no deferred tax expense. Thus, the income tax expense equals current income tax expense which is the amount of taxes payable and equal to $84,000 ($280,000 X 30%).

• Question 2292:

  Current liabilities are recorded at ________.

  A. their market value

  B. their present value

  C. their maturity value

  D. the lower of cost or market value

  Correct Answer: C

  While all assets and liabilities, for analysis purposes, should be considered at their fair present value, the short horizon of current liabilities means that in practice, they are recorded at their face value. This means that the stated principal value of the liability is recorded as is, without factoring in interests expenses. This practice covers current liabilities arising from both operating activities (like advance payments and taxes payable) and financing activities (like accounts payable and short-term loans).

• Question 2293:

  Which of the following is/are revenue recognition methods?

  I. Cost Recovery Method

  II. Installment Method

  III. Sales Cost Method

  IV.

  Successful Efforts Method

  A.

  II, III and IV

  B.

  I and II

  C.

  I, II and III

  D.

  III and IV

  Correct Answer: B

  IV refers to a method under which costs in drilling oil wells can be capitalized and is not a revenue recognition method.

• Question 2294:

  Which of the following is/are true under accrual accounting?

  I. Revenues are recognized when goods are delivered.

  II. Revenues are recognized when cash is received.

  III. Revenues are recognized in proportion to expenditures incurred.

  IV.

  Revenues are matched with the associated costs.

  A.

  II and IV

  B.

  I, III and IV

  C.

  II and III

  D.

  I and IV

  Correct Answer: D

  III is not necessarily true. It is used only by a few specific firms under a method called "Percentage completion of contract."

• Question 2295:

  Which of the following does not affect a firm's cash flows:

  A. warranty expenses.

  B. sale of an "impaired" asset.

  C. purchase of a trademark financed by stock issuance.

  D. change of depreciation method.

  Correct Answer: C

  When the depreciation method is changed, the taxes paid are affected, thus affecting the cash flows indirectly. Sales or purchases of assets and expenses like warranty costs have a direct impact on cash flows. However, when stock is issued to finance an acquisition, there is no net cash involved in the transaction.

• Question 2296:

  Which of the following expenses can be capitalized?

  I. Research costs incurred in developing a new medicine.

  II. Purchase of intangibles for RandD activities which have alternative future uses.

  III.

  Salaries of research personnel.

  A.

  II only

  B.

  I and II

  C.

  III only

  D.

  none of them

  Correct Answer: A

  US GAAP requires that all RandD costs be expensed immediately (unless they generate tangible or intangible assets which have alternative future uses which are measurable). RandD costs include salaries for research personnel.

• Question 2297:

  The statement of cash flows provides us with important clues on all of the following except:

  A. Financial practices of management.

  B. Projected changes for the following year in current liability accounts.

  C. Feasibility of financing capital expenditures.

  D. Ability to meet debt service requirements.

  Correct Answer: B

  The statement of cash flows is very informative and can tell you a lot about a company. However, it does not tell you the direction the company is heading as far as its near term liquidity. It can not be inferred that because a company has a lot of cash flow that its payable balances will decrease in the followingyear. There could be many reasons for holding excess cash including business seasonality and potential acquisitions.

• Question 2298:

  Stock splits have the following effects on the financial statements:

  A. contributed capital and retained earnings are unchanged

  B. all of these answers are correct

  C. the account title for common stock changes to reflect the change in the par value of stock

  D. disclosures about the stock on the balance sheet are changed to reflect the additional outstanding shares and the revised par value per share

  Correct Answer: B

  All of the responses represent the effect of stock splits on the financial statements.

• Question 2299:

  Birch Ltd. had net income for the year of $101,504 and a simple capital structure consisting of the following common shares outstanding:

  Months Outstanding Number of Shares

  January - February 24,000 March - June 29,400 July - November 36,000 December 35,040

  Birch's earnings per share (rounded to the nearest cent) were ________.

  A. $2.90

  B. $3.45

  C. $4.23

  D. $3.20

  E. $3.25

  Correct Answer: D

  EPS equals net income divided by the weighted average number of shares outstanding and is $3.20 ($101,504 / 31,720). Following is the calculation for the weighted average number of shares outstanding:

  24,000 X (2 / 12) = 4,000 29,400 X (4 / 12) = 9,800 36,000 X (5 / 12) = 15,000 35,040 X (1 /12) = 2,920 weighted average 31,720

• Question 2300:

  A firm had retained earnings of $100,000 at the beginning of the year. During the year, the firm had a net income of $55,000 and paid dividends worth $20,000. Then, the change in the firm's retained earnings equals ________.

  A. $155,000

  B. $35,000

  C. $55,000

  D. $135,000

  Correct Answer: B

  Ending retained earnings = Beginning retained earnings + Net Income - Dividends paid. Hence, change in retained earnings = $55,000-$20,000 = $35,000.