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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 130 )

Updated On: 30-Jan-2026
Page 130 of 793
PDF with 3960 Questions

A firm using LIFO accounting has a LIFO reserve of 900, with a LIFO ending inventory of 8,100. It is currently in the 40% tax bracket. If it switches to FIFO accounting, which of the following is true?

  1. Its ending FIFO inventory equals 7,200
    II. Its deferred taxes decrease by 360
    III. Its equity increases by 540
  2. III only
  3. I & III
  4. II & III
  5. I, II & III

Answer(s): A

Explanation:

LIFO Reserve = FIFO Ending inventory value - LIFO Ending inventory value Therefore, the ending inventory under FIFO = 8,100 + 900 = 9,000. The deferred taxes increase by 900*0.4 = 360 and the equity increases by 900*(1-0.4) = 540.



Which of the following is/are true under accrual accounting?

  1. Expenses are recognized as services are used.
    II. Revenues are recognized when service is performed.
    III. Cash outflows determine expense recognition.
  2. II & III
  3. I & II
  4. I & III
  5. I, II & III

Answer(s): B

Explanation:

With accrual accounting expenses are recognized when they are incurred, not when the cash is disbursed.



In January 1996, Weber Co. purchased a mineral mine for $2,640,000 with removable ore estimated at 1,200,000 tons. After it has extracted all the ore, Weber will be required by law to restore the land to its original condition at an estimated cost of $180,000. Weber believes it will be able to sell the property afterwards for $300,000. During 1996, Weber incurred $360,000 of development costs preparing the mine for production and removed and sold 60,000 tons of ore. In its 1996 income statement, what amount should Weber report as depletion?

  1. $150,000
  2. $132,000
  3. $135,000
  4. $159,000
  5. $144,000

Answer(s): E

Explanation:

The depletion base is the purchase price of the land ($2,640,000), minus the value of the land after restoration $120,000 ($300,000 -180,000), plus any costs necessary to prepare the property for the extraction of ore ($360,000). The depletion charge is $2.40 per ton ($2,640,000 -120,000 + 360,000) / 1,200,000 tons).
Therefore, the firm should report $144,000 ($2.40 X 60,000 tons) as 1996 depletion expense.



If a firm's profit margin increases by 8%, the debt-to-equity ratio increases from 35% to 55% and its asset turnover falls by 20%, the effect on its ROE is ________.

  1. +1.3%
  2. +0.24%
  3. -0.8%
  4. +1.6%

Answer(s): C

Explanation:

ROE = net income/equity = (net income/sales)*(sales/assets)*(assets/equity) = (profit margin)*(asset turnover)* (1+debt/equity) The original assets/equity = 1 + 0.35 = 1.35 and the changed assets/equity = 1.55. Therefore, the change in ROE equals (1+8%)*(1-20%)*1.55/1.35 = 0.992. Thus, ROE falls by 0.8%.



Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.

Cash from operating activities $60,000
Net Income (4,000)
Depreciation (2,000)
Increase in accounts receivable (1,000)
Increase in deferred tax liability $53,000

Cash from investing activities ($48,000)
Purchase of marketable securities 2,500
Dividends received 1,500
Dividends paid ($44,000)

Cash from financing activities (500)

Increase in Short-term debt (2,500)
Increase in Long-term debt ($3,000)
Increase in cash $6,000

The correct cash flows from operating activities is ________.

  1. $65,500
  2. $63,500
  3. $53,500
  4. None of these answers

Answer(s): A

Explanation:

60,000 + 4000(depreciation) - 2,000 (receivables) + 1,000 (deferred taxes) +2,500 (dividends received)



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