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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 126 )

Updated On: 26-Jan-2026
Page 126 of 793
PDF with 3960 Questions

Deferred taxes would be classified as

  1. a long-term borrowing.
  2. a current liability.
  3. a current asset.
  4. a prepaid expense.
  5. stockholders' equity.

Answer(s): C

Explanation:

Deferred income taxes represent deferred tax assets.



A firm issued 2 million warrants with an exercise price of 102 on June 15, 1996. The maximum price of the stock in 1996 was 129, the average price was 110. The stock closed out the year at 99. How many additional shares must be used in the computation of Diluted EPS as a result of these warrants?

  1. 111,782
  2. 145,454
  3. 78,788
  4. zero

Answer(s): C

Explanation:

The conversion assumptions for options and warrants are as follows:
1. They are assumed to be exercised at the beginning of the period or at the time of issuance, whichever is later.
2. They enter into the Diluted EPS calculations only if the average stock price during the period exceeds the exercise price. With the Treasury stock method, the total shares repurchased using exercise proceeds = 2*102/110 = 1,854,546. Thus, additional shares issued = 2 million - 1,854,546 = 145,454. These are outstanding for 6.5 months. Therefore, additional weighted shares = 145,454*6.5/12 = 78,788.



Which of the following correctly defines an element directly related to measuring the performance and status of a business entity?

  1. Gains are increases in equity from transactions and other events and circumstances that result from revenues or investments by owners.
  2. Equity is a residual interest.
  3. Investments by owners are limited to receipts of assets and satisfaction or conversion of liabilities.
  4. Revenues are inflows from peripheral or incidental transactions as well as the entity's ongoing major operations.
  5. None of these answers.

Answer(s): B

Explanation:

Equity in a business is considered a residual interest and represents the ownership (total assets minus total liabilities) in the firm.



A piece of equipment costs $200,000, has a useful life of 5 years and an estimated salvage value of $50,000. How much depreciation expense should the company recognize in year 4 if it is using the sum-of-the- years' digits method of depreciation?

  1. $30,000
  2. $80,000
  3. $26,666.67
  4. $20,000

Answer(s): D

Explanation:

Using the sum-of-the-years' digits the sum of the years is 15. In year 4 you would take 2/15 of the cost less the salvage value. 2/15 of $150,000 is equal to $20,000.



In the successful effort method, oil firms:

  1. are required to expense all oil-drilling costs resulting in dry holes.
    II. can capitalize drilling costs which result in productive oil wells.
    III. are required to capitalize all oil-drilling costs.
    IV. are required to expense all oil-drilling costs.
  2. I only
  3. I & II
  4. III & IV
  5. II only

Answer(s): B

Explanation:

In extractive industries, firms are allowed to use either the full-cost method, in which all search and development costs can be capitalized, or the successful-efforts method, where all such costs are expensed unless they result in revenue-generating assets, in which case, they are capitalized. If an oil drilling firm uses the successful-efforts method, it expenses costs incurred on dry holes and capitalizes those resulting in oil- producing wells.



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