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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 125 )

Updated On: 26-Jan-2026
Page 125 of 793
PDF with 3960 Questions

A U.S. investor is considering investing in a security of a company in a developing country. The country's market is characterized by infrequent trading, high inflation, large market volatility, low operating leverage, political unrest, low debt usage, and a depreciating exchange rate. In determining the appropriate country risk premium for the developing country, the investor should consider:

  1. liquidity risk, exchange rate risk, financial risk, business risk, balance sheet risk
  2. financial risk, liquidity risk, exchange rate risk, country risk, business risk
  3. business risk, variability risk, country risk, exchange rate risk, financial risk

Answer(s): B



A dividend that distributes more than 25% of the outstanding shares before the dividend is called:

  1. a liquidating dividend
  2. illegal
  3. a large stock dividend
  4. a capitalizing dividend

Answer(s): C

Explanation:

Large stock dividends distribute greater than 25% of outstanding shares before the dividend and small stock dividends distribute less than or equal to 25% of previously outstanding shares.



Which of the following best describes a balance sheet?

  1. None of these answers.
  2. A balance sheet reports changes over a period of time in component accounts that comprise the ownership of a firm.
  3. A balance sheet summarizes the financial position of a company at a given point in time.
  4. A balance sheet details the cash inflows and outflows that are related to a company's operating, investing, and financing activities over a period of time.
  5. A balance sheet measures a company's financial performance over a specified period of time.

Answer(s): C

Explanation:

A balance sheet provides a detailed listing of a company's assets, liabilities, and equity at a point in time. This provides a glimpse at a company's financial condition.



Irwin Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums saved minus recognized losses from lawsuits and other claims. As a result of a 1996 accident, Irwin is a defendant in a lawsuit in which it will probably have to pay damages of $190,000. What are the effects of this lawsuit's probable outcome on Irwin's 1996 financial statements?

  1. An increase in expenses and no effect on liabilities.
  2. No effect on expenses and an increase in liabilities.
  3. An increase in both expenses and liabilities.
  4. None of these answers.
  5. No effect on either expenses nor liabilities.

Answer(s): C

Explanation:

Since the outcome of the lawsuit is probable and estimable, the amount of $190,000 will be recorded in the financial statements as a contingent liability and an expense.



At the end of an accounting period, each expense that has been incurred but not yet paid should be recorded as ________.

  1. a closing entry
  2. an opening entry
  3. an adjusting entry
  4. a reversing entry

Answer(s): C

Explanation:

Expenses should be recognized in the period in which they are incurred. In order to be consistent with the matching principle, an adjusting entry must be made to record the expense, regardless of whether it has been paid.



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