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

• Question 2311:

  Which of the following statements is true?

  A. Recognition is concerned with recognizing a liability from a current cash receipt.

  B. The Accrual process would reduce an asset that is recorded as a result of a cash payment.

  C. Realization is the process of converting non-cash resources and rights into money.

  D. All of these are true.

  E. Allocation is the process of formally recording or incorporating an item in the financial statements of an entity.

  Correct Answer: C

  Realization is the process of converting non-cash resources and rights into money and is most precisely used in accounting and financial reporting to refer to sales of assets for cash or claims to cash.

• Question 2312:

  Preferred and common stock differ in that

  A. failure to pay dividends on common stock will not force the firm into bankruptcy, while failure to pay dividends on preferred stock will force the firm into bankruptcy.

  B. common stock dividends are a fixed amount, while preferred stock dividends are not.

  C. preferred stock dividends are deductible as an expense for tax purposes, while common stock dividends are not.

  D. preferred stock has a higher priority than common stock with regard to earnings and assets in the event of bankruptcy.

  E. none of these answers.

  Correct Answer: D

  In the event of bankruptcy, the claims of preferred shareholders must be satisfied before common shareholders receive anything. The interests of common shareholders are secondary to those of other claimants.

• Question 2313:

  Which of the following statements is true?

  A. Recognition is concerned with recognizing a liability from a current cash.

  B. Deferral is the process of formally recording or incorporating an item in the financial statements of an entity.

  C. Realization would reduce a liability that is recorded as a result of a cash receipt by recognizing revenues.

  D. Allocation is the process of converting non-cash resources and rights into money.

  E. Accrual is the process of recognizing assets, liabilities, and components of comprehensive income.

  Correct Answer: E

  Accrual is the process of recognizing assets, liabilities, and components of comprehensive income.

• Question 2314:

  The primary current source of generally accepted accounting principles rests with the ________.

  A. Securities and Exchange Commission

  B. Institute of Management Accountants

  C. American Institute of Certified Public Accountants

  D. New York Stock Exchange

  E. Financial Accounting Standards Board

  Correct Answer: E

  FASB was created as an autonomous body with the responsibility of establishing financial accounting standards. It is responsible to hear all viewpoints from the entire economic community and be unbiased.

• Question 2315:

  Which of the following is NOT a deferred credit item?

  A. Deferred gain on installment sales

  B. None of these answers

  C. Deferred tax credits

  D. Advance rental payments

  Correct Answer: B

  All of the responses qualify as deferred credit items.

• Question 2316:

  Firms report payments for capital leases in the cash flow statement

  A. only as financing cash flows.

  B. partly as operating cash flows and partly as investing cash flows.

  C. only as investing cash flows.

  D. partly as operating cash flows and partly as financing cash flows.

  Correct Answer: D

  Interest expense is classified as CFO and amortization of the lease obligation is reported as cash from financing activities.

• Question 2317:

  Which of the following is/are true?

  I. An increase in inventories has a positive impact on cash flows.

  II. An increase in receivables has a positive impact on cash flows.

  III. Deferred taxes increase current cash balance.

  IV.

  Utilization of tax loss carry-forwards has a positive impact on cash flows.

  A.

  III and IV

  B.

  II and III

  C.

  I and II

  D.

  I, II, III and IV

  Correct Answer: A

  An increase in inventories implies cash was spent to obtain more goods than were sold. An increase in receivables implies part of the sales were made on credit, not a cash basis. Both of these have a negative impact on cash flows. Deferring taxes implies some of the cash expense was delayed into the future, increasing the current cash balance. Utilization of tax loss carry-forwards implies a reduction in the taxable income by the amount of the carry-forward. This reduces cash expense on taxes.

• Question 2318:

  How should holdings of equity securities of less than a 20% interest generally be classified on a firm's balance sheet?

  A. As either trading or available-for-sale securities

  B. Using the equity method

  C. All of these answers

  D. As controlling interest securities

  E. None of these answers

  Correct Answer: A

  So long as it is management intent, these securities should be classified as either trading or availableforsale securities. The equity method is used to account for an equity interest where management has an ability to exert significant influence over an investee's business activities.

• Question 2319:

  The balance sheet

  A. reports all of the cash inflows and shows specifically how that cash was used.

  B. is a report that shows the change in the financial position of a firm.

  C. reports the firm resources and how those resources were specifically used.

  D. reports the firm resources, claims on those resources, and stockholders' equity at specific points in time.

  E. reports the assets and liabilities of the firm for the accounting period.

  Correct Answer: D

  The balance sheet reports the categories and amounts of assets, liabilities, and stockholders' equity at specific points in time.

• Question 2320:

  All of the following are attributes of depreciation except

  A. depreciation stays on the balance sheet as long as the asset is owned by the corporation.

  B. depreciation provides funds for replacement of an asset.

  C. depreciation is allocation of the cost of an asset over its useful life.

  D. the purpose of depreciation is to charge against operations, by means of allocation, the cost of an asset.

  Correct Answer: B

  Depreciation is a non-cash expense. It shows up as an increase to cash on the statement of cash flows.