CFA Institute CFA-LEVEL-1 Online Practice Questions and Exam Preparation

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3331:

  The Income Summary account is

  A. a permanent account
  B. an asset
  C. a temporary account
  D. a liability
  C. a temporary account

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  Explanation

  The Income Summary account is a temporary account created especially for the closing process and is used only for flowing adjustments and closing entries through.

• Question 3332:

  Sal Nunn, CFA, is a portfolio manager at Walker Investments. Nunn sold 300,000 shares of a NASDAQ listed stock on an electronic crossing network in after hours trading because the company announced a significant negative earnings surprise. Indicate whether the third or fourth market best describes the Nunn trade and state whether the NASDAQ market is a call or continuous market.

  A. Nunn's trade is in the third market and NASDAQ is a call market.
  B. Nunn's trade is in the fourth market and NASDAQ is a call market.
  C. Nunn's trade is in the fourth market and NASDAQ is a continuous market.
  C. Nunn's trade is in the fourth market and NASDAQ is a continuous market.

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  Explanation

• Question 3333:

  A firm pays out half its earnings as dividends. If its net income is $50, then

  I. Its assets increase by $25

  II. Its equity increases by $25

  III. Its equity increases by $50

  IV.

  The book value of the firm increases by $50

  A. III and IV
  B. I and II
  C. I and IV
  D. II and IV
  B. I and II

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  Explanation

  Since half of $50 is paid out as dividends and the other half retained, the book value and equity increase by $25 and so do assets. Remember the basic equation, Assets = Liabilities + Equity.

• Question 3334:

  The ________ elasticity of domestic demand for imports and foreign demand for exports is ______.

  A. short-run; elastic
  B. long-run; inelastic
  C. short-run; unit-elastic
  D. none of these answers
  E. short-run; inelastic
  E. short-run; inelastic

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  Explanation

  The short run elasticity of domestic demand for imports and foreign demand for exports is inelastic. So a depreciation initially increases import expenditures and export sales. In the long run, the demand for both imports and exports is elastic.

• Question 3335:

  The confidence index is:

  A. the ratio of the average yield on 10 top grade bonds to Dow Jones average of 40 bonds.
  B. the ratio of the volume of the 5 top grade bonds to the volume of on-the-run T-bills.
  C. the ratio of the total NYSE capitalization to the outstanding short interest.
  D. The ratio of long-term bond spread to aggregate market dividend yield.
  A. the ratio of the average yield on 10 top grade bonds to Dow Jones average of 40 bonds.

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  Explanation

  The Confidence index, published by Barron's, is the ratio of the average yield on 10 top grade bonds to the Dow Jones average of 40 bonds. The index measures the difference in yield spreads between high-grade bonds and a large cross-section of available bonds. Since high-grade bonds always have lower yields, the index value never exceeds 100. An increase in this index implies that yields on high-grade bonds and those on ordinary bonds have converged i.e. the yield spread between the bonds has narrowed. From a demand perspective, this will happen when the demand for riskier bonds rises i.e. when investors are bullish.

• Question 3336:

  Which of the following type of REIT's make construction loans to real estate investors?

  A. Equity REIT's
  B. Equity REIT's and Hybrid REIT's
  C. Hybrid REIT's
  D. Mortgage REIT's and Hybrid REIT's
  E. Mortgage REIT's
  D. Mortgage REIT's and Hybrid REIT's

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  Explanation

  Mortgage - these make construction loans to real estate investors.

  Hybrid - these invest in both properties, construction and real estate mortgage loans.

• Question 3337:

  When dealing with a trust, according to the Prudent Man Rule, trustees must:

  A. apply "all reasonable efforts" to the remaindermen.
  B. be impartial between income beneficiaries and remaindermen.
  C. take into account income beneficiaries first, then the remaindermen.
  D. take into account the remaindermen first, then the income beneficiaries.
  E. apply "all reasonable efforts" to the income beneficiaries.
  B. be impartial between income beneficiaries and remaindermen.

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  Explanation

  Under the Prudent Man Rule, trustees must be impartial between income beneficiaries and remaindermen and must achieve an equitable balance between current income and the preservation of principal in real terms.

• Question 3338:

  Annah Korotkin is the sole proprietor of CoverMeUp, a business that designs and sews outdoor clothing for dogs. Each year, she rents a booth at the regional Pet Expo and sells only blankets. Korotkin views the Expo as primarily a marketing tool and is happy to break even (that is, cover her booth rental). For the last 3 years, she has sold exactly enough blankets to cover the $750 booth rental fee. This year, she decided to make all blankets for the Expo out of high-tech waterproof/breathable material that is more expensive to produce, but that she believes she can sell for a higher profit margin. Information on the two types of blankets is as follows:

  

  Assuming that Korotkin remains most interested in covering the booth cost (which has increased to $840), how many more or fewer blankets (new style) does she need to sell to cover the booth cost? To cover this year's booth costs, Korotkin needs to sell:

  A. 42 more blankets than last year.
  B. 42 fewer blankets than last year.
  C. 30 fewer blankets than last year.
  D. the same amount of blankets as last year.
  C. 30 fewer blankets than last year.

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  Explanation

  To obtain this result, we need to calculate Last Year's Breakeven Quantity, This Year's Breakeven Quantity, and calculate the difference.

  Step 1: Determine Last Year's (Basic Blanket) breakeven quantity:

  QBE= (Fixed Costs) / (Sales Price per unit ?Variable Cost per unit) = 750 / (25 ?20) = 150

  Step 2: Determine This Year's (New Blanket) breakeven quantity:

  QBE= (Fixed Costs) / (Sales Price per unit ?Variable Cost per unit) = 840 / (40 ?33) = 120

  Step 3: Determine Change in Units:

  Q = QThis Year?QLast Year= 120 ?150 = -30. Korotkin needs to sell 30fewerblankets.

• Question 3339:

  Lloyd Enterprises has a project, which has the following cash flows: Year Cash Flows 0-$200,000 1 50,000 2 100,000 3 150,000 4 40,000 5 25,000 The cost of capital is 10 percent. What is the project's discounted payback?

  A. 2. 3333 years
  B. 1.8763 years
  C. 2. 4793 years
  D. 2. 0000 years
  E. 2. 6380 years
  E. 2. 6380 years

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  Explanation

  Discounted CFCumulative CF 0-200,000.00-200,000.00 145,454. 55-154,545. 45 282,644. 63-71,900.82 Payback 3112,697. 22+40,796. 40 427,320.54+68,116. 94 515,523. 03+83,639.97 Payback period = 2 years + (71,900.82/112,697. 22) = 2. 638 years.

• Question 3340:

  An increase in the LIFO reserves implies which of the following?

  I. Prices may have risen.

  II. More goods might have been sold than purchased.

  III. Firm may have changed inventory accounting from FIFO to LIFO.

  IV.

  The firm may have indulged in excess purchasing to reduce taxes.

  A. II, III and IV
  B. I and II
  C. I and IV
  D. none of them
  C. I and IV

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  Explanation

  The LIFO Reserve equals the difference in the inventory value under FIFO and under LIFO. This reserve will increase if either prices have risen sufficiently to cause a high ending inventory value or if the firm purchased more goods than it sold in times of rising prices. Note that II represents a LIFO liquidation, not an increase in the reserves. III does not lead to a change in LIFO reserves. Finally, remember that IV is one way firms using LIFO can manipulate earnings and taxes, by changing the purchasing behavior at year-end.