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

• Question 2331:

  A cash flow statement using the indirect method

  A. is as informative as using the direct method.

  B. begins with a firm's cash collections.

  C. uses major categories of gross cash receipts and payments.

  D. provides little new information into a firm's cash-generating ability.

  Correct Answer: D

  Because of the indirect format, it is not possible to compare operating cash inflows and outflows by function with the revenue and expense activities that generated them.

• Question 2332:

  An analysis of a firm's financial statements indicates that the average age of its assets is declining. This could be due to which of the following?

  I. The firm is acquiring new assets with longer depreciable lives.

  II. The firm's capital expenditures are outpacing depreciation.

  III. The firm is not using its assets as intensively as it should.

  IV.

  The firm is operating in its maturity phase.

  A.

  I and IV

  B.

  I and II

  C.

  I, II, III and IV

  D.

  III and IV

  Correct Answer: B

  Note that the firm is likely not in a maturity or declining phase but in a growth phase, which is characterized by increasing capital investments.

• Question 2333:

  When a firm experiences LIFO liquidation under rising prices, it recognizes:

  A. lower COGS and lower cash flows.

  B. lower COGS and higher cash flows.

  C. higher COGS and lower cash flows.

  D. higher COGS and higher cash flows.

  Correct Answer: A

  In LIFO liquidation under rising prices, the quantity of goods purchased during a period is less than the quantity sold. This leads to a sale of goods purchased in prior periods at lower prices (since prices are rising). This understates the cost- of-goods-sold (COGS), thus overstating the income and causing higher taxes than in the absence of the LIFO liquidation. The higher taxes cause a higher cash outflow. (This is an extremely important topic with which you should be completely familiar.)

• Question 2334:

  Which of the following is/are true about the cash conversion cycle?

  I. It increases as the inventory turnover ratio decreases.

  II. It decreases as inventory processing period decreases.

  III. It is directly proportional to the payables payment period.

  IV.

  It increases as the cash ratio decreases.

  A.

  II, III and IV

  B.

  I and IV

  C.

  II and III

  D.

  I and II

  Correct Answer: D

  The cash conversion cycle is a measure of how long the cash is tied up in short term loans and credits.

  These short-term financing items include receivables, inventory and accounts payable. Therefore cash

  conversion cycle is defined as:

  CCC = (Average receivables collection period) plus (Average inventory processing time) minus (Average

  payables payment period). Now, an increase in inventory ratio decreases inventory processing time,

  lowering the CCC. Also, an increase in the payables payment period decreases the CCC. However, CCC

  is independent of the cash ratio.

• Question 2335:

  The portion of the insurance premiums that has expired during the fiscal period is classified as:

  A. an expense

  B. an asset

  C. an increase in retained earnings

  D. a liability

  Correct Answer: A

  In accordance with the matching rule, the amount of an insurance policy that has expired during the accounting period must be recorded and classified as an expense for the period.

• Question 2336:

  Which of the following best highlights a company's financial condition and overview of the results of operations?

  A. The security and exchange commissions 401-k report

  B. The auditor report

  C. The statement of cash flows

  D. None of these answers

  E. Management's discussion and analysis

  Correct Answer: E

  Management's discussion and analysis provide a great deal of detail regarding the company's financial condition, the results of operations, favorable, or unfavorable trends, and significant events that have affected or will affect a firm.

• Question 2337:

  Which accounting principle is consistent with reporting financial results that can be compared with previous periods?

  A. adequate disclosure

  B. matching

  C. consistency

  D. materiality

  Correct Answer: C

  The consistency principle requires that an accounting procedure, once adopted by a company, remain in use from one period to the next unless users are informed of the change.

• Question 2338:

  With respect to depreciation methods, which of the following is true?

  I. Accelerated depreciation methods lead to higher depreciation expense over time.

  II. The Straight-line method causes higher taxes in later years.

  III.

  Accelerated methods are preferred for tax reasons.

  A.

  III only

  B.

  II and III

  C.

  I and III

  D.

  II only

  Correct Answer: A

  Accelerated methods cause depreciation expense to decrease over time. In later years, the straight- line method leads to higher depreciation compared to accelerated methods and hence, leads to lower taxes.

• Question 2339:

  Why is book value per share important?

  A. Because it is frequently used in assessing merger terms.

  B. All of these answers.

  C. It is the best method of determining the market value of a firm's common stock.

  D. None of these answers.

  E. Book value per share is the "true" value of a firm's common stock.

  Correct Answer: A

  Book value per share is often times used by firms in determining merger terms. Book value per share plays an important role in the analysis of financial statements since one method of valuation begins with the book value per share figure, to which an estimate of future earnings is added. An estimate of the future profitability of a firm can be based directly on the earnings capacity of its asset base.

• Question 2340:

  The balance sheet of Firm A shows the following:

  Cash and Cash equivalents 432 Receivables 98 Inventories 143 Marketable securities 329 Short-term loans 732 Current portion of long-term debt 210

  The quick ratio of the firm equals ________.

  A. 0.91

  B. 4.09

  C. 1.17

  D. 0.83

  Correct Answer: A

  The quick ratio is the current ratio calculated using only relatively liquid securities. These current assets are cash, marketable securities and receivables. Thus, Quick ratio = (cash + marketable securities + receivables)/current liabilities In this case, Quick ratio = (432+98+329)/(732+210) = 0.91