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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 132 )

Updated On: 30-Jan-2026
Page 132 of 793
PDF with 3960 Questions

When a plant asset is sold for more than its book value

  1. book value of the asset minus gain on disposal equals cash received
  2. cash received plus accumulated depreciation plus gain on disposal equals the original cost
  3. original cost minus accumulated depreciation equals cash received plus gain on disposal
  4. cash received plus accumulated depreciation minus gain on disposal equals the original cost

Answer(s): D

Explanation:

Gain or loss on disposal of a fixed asset is calculated by subtracting the book value (Original cost - Accumulated Depreciation) from the cash received.



In practice, companies who use the direct method in presenting cash flows from operations:

  1. must also disclose cash flows from operations using the indirect method.
  2. must classify interest paid as an investing activity.
  3. must be privately held or closely held corporations.
  4. are not required to report cash flows not incurred during the ordinary course of business.

Answer(s): A

Explanation:

The advantage of the indirect method is it reconciles differences between net income and cash flows from operating activities.



The amount by which a plant asset depreciated is classified as

  1. a liability
  2. an asset
  3. an expense
  4. revenue

Answer(s): C

Explanation:

Depreciation is the periodic allocation of the cost of a tangible, long-term asset over its estimated useful life, and therefore a period expense.



Under an inflationary environment with a constant inventory quantity, the LIFO Reserve tends to ________.

  1. increase over time.
  2. decrease over time.
  3. stays constant over time.
  4. fluctuate with COGS.

Answer(s): A

Explanation:

As prices increase and LIFO layers are maintained, the inventory value at FIFO keeps increasing while that at LIFO remains constant. Hence, the reserve keeps increasing.



At December 31, 1996, Eaton Corp. reported $1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in 1997 at a cost of $1,500,000. In 1997, Eaton appropriated $1,200,000 of retained earnings for the construction of a new plant. Also, $2,000,000 of cash was restricted for the retirement of bonds due in 1998. In its 1997 balance sheet, what amount should Eaton report as appropriated retained earnings?

  1. $2,950,000
  2. $3,200,000
  3. $1,450,000
  4. $1,750,000
  5. $1,200,000

Answer(s): E

Explanation:

Appropriating retained earnings is a formal way of marking a portion of retained earnings for other uses. This is done by reducing retained earnings and transferring the money to appropriated retained earnings. When the appropriation is no longer necessary, the money is moved back to retained earnings.



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