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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 108 )

Updated On: 26-Jan-2026
Page 108 of 793
PDF with 3960 Questions

Which of the following is not subject to depreciation?

  1. automobiles
  2. land
  3. machinery
  4. land improvements

Answer(s): B

Explanation:

Land has unlimited useful life and is not consumed when it is used, and therefore not subject to depreciation.



Which of the following statements are correct?

  1. A company's choice of accounting principles for financial reporting purposes does not affect net cash flow for the accounting period.
    II. A company's choice of accounting principles for financial reporting purposes does not affect operating cash flow.
    III. If a company sells its receivables this will increase operating cash flow.
    IV. If a company sells its receivables this will increase financing cash flow.
  2. I and III
  3. I, II and III
  4. II and IV
  5. I and IV

Answer(s): A

Explanation:

The choice of accounting principles affects only the classification and not the net cash flow, and reducing receivables in considered an increase in operating cash flow.



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

  1. 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
  2. III & IV
  3. I & II
  4. I & IV
  5. II & IV

Answer(s): B

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.



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

common shares outstanding:

Months OutstandingNumber of Shares

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

Assume Birch issued a 20% stock dividend on August 1st. In this case, earnings per share (rounded to the nearest cent) were

  1. $2.72
  2. $2.67
  3. $2.88
  4. $4.23
  5. $2.41

Answer(s): B

Explanation:

Following is the calculation for the weighted average number of shares outstanding (before the 20% stock dividend):
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
Stock dividends are assumed to have occurred at the beginning of the year. Thus, the weighted average number of shares equals the amount before the stock dividend plus 20% more which is equal to 38,064 (31,720 + 20% X 31,720). EPS equals net income divided by the weighted average number of shares outstanding which is $2.67 ($101,504 / 38,064).



A firm has a high debt-to-equity ratio. In order to improve this ratio in earlier years, it will prefer:

  1. LIFO accounting and accelerated depreciation.
  2. LIFO accounting and straight-line depreciation.
  3. FIFO accounting and straight-line depreciation.
  4. FIFO accounting and accelerated depreciation.

Answer(s): C

Explanation:

The company will use FIFO (assuming prices are increasing) and straight line depreciation to increase income and hence, retained earnings. This improves the debt-to-equity ratio.



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