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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 133 )

Updated On: 30-Jan-2026
Page 133 of 793
PDF with 3960 Questions

Which of the following would not be a limitation of the balance sheet?

  1. Long-lived assets may not reflect their market value because they are stated at historical cost.
  2. Significant assets and liabilities may be omitted because GAAP does not require their inclusion.
  3. GAAP permits companies to delay recognition of value changes, such as employee benefit plans.
  4. Some assets and liabilities are carried at historical cost bearing little relationship to their real market value.
  5. The firm's market value would not be able to be estimated due to historical costing.

Answer(s): E

Explanation:

The balance sheet does not report the market value of a firm's assets, liabilities, or equity, although the information provided can be useful when estimating the market value of the firm or its securities.



Which combination leads to the lowest income tax paid in earlier years of a firm?

Inventory valuationDepreciation

  1. FIFOStraight-line
    II.LIFOStraight-line
    III.FIFODouble Declining
    IV.LIFODouble Declining
  2. IV.
  3. II.
  4. I.
  5. III.

Answer(s): A

Explanation:

In the earlier years, this combination results in the lowest income reported and hence, the lowest taxes.



A firm has a constant pre-depreciation income using assets that last 5 years. The straight-line method results in a rate of return that ________ over the life of the assets. The accelerated methods result in a rate of return that ________ over the life of the assets.

  1. increases, increases
  2. decreases, increases
  3. decreases, decreases
  4. increases, decreases

Answer(s): A

Explanation:

The straight line and all accelerated depreciation methods giving an increasing rate of return on assets over the asset life (the pre-depreciation income is held constant to isolate the effect). This is a mathematical fact which you can easily prove.



An asset with a 10-year life has an acquisition cost of 5,000. The firm, using double declining method of depreciation has an accumulated depreciation of 2,440 at the end of year 3 (verify this!). The depreciation expense in year 4 is equal to ________.

  1. 467
  2. 630
  3. 512
  4. 731

Answer(s): C

Explanation:

The book value at the beginning of year 4 = 5,000-2,440 = 2,560. Then, depreciation expense in year 4 = 2/10*book value = 512.



The weighted average method is based on the assumption that the cost of merchandise sold should be calculated using the :

  1. lower of cost or market (LCM)
  2. FIFO
  3. LIFO
  4. weighted average cost

Answer(s): D

Explanation:

Under the weighted average method, inventory is priced at the average cost of the goods available for sale (Beginning inventory plus purchases during the period). The cost for the ending inventory under this method is influenced by all the prices paid during the period.



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