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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 136 )

Updated On: 30-Jan-2026
Page 136 of 793
PDF with 3960 Questions

Gamma-Theta is a financial software firm with gross sales of 176,000 last year. Its cost of goods sold equaled 25,685. Gamma-Theta's corporate tax rate is 35%. If its net income after taxes was 70,279, its operating expenses were ________.

  1. 31,889
  2. 42,193
  3. 29,495
  4. 51,722

Answer(s): B

Explanation:

Gamma-Theta's pre-tax income equals 70,279/0.65 = 108,122. Now, pre-tax income = gross sales - cost of goods sold - operating expenses. Therefore, 108,122 = 176,000 - 25,685 - operating expenses. This gives operating expenses = 42,193.



Restricted cash balances are ________.

  1. non-current assets
  2. not considered assets
  3. none of these answers
  4. regarded as part of long-term equity

Answer(s): A

Explanation:

At times, firms earmark cash deposits and balances for meeting longer term obligations like sinking funds or plant expansions. Such restricted cash balances are reported as non-current assets even though they are in a liquid form, since they are not available to satisfy current liabilities.



Which of the following is/are true?

  1. Straight preferred equity holders to do not have a right to demand redemption.
    II. Dividend payments on preferred equity are cumulative.
    III. Dividends on common stock cannot be paid unless preferred dividends are paid.
    IV. Preferred dividends which are in arrears are a non-recorded liability.
  2. I & IV
  3. I, II, III & IV
  4. I, II & III
  5. II, III & IV

Answer(s): B

Explanation:

Preferred equity is usually not redeemable, implying that preferred equity holders do not have a right to demand from the company a retirement of their equity through redemption payment. Preferred dividends that are not paid when due remain a liability, though they are not recorded as such. This leads to an understatement of liabilities since someday, these dividends must definitely be paid. In particular, the dividends in arrears are cumulative and must be paid in full before any ordinary dividends can be paid to common stockholders.



The accumulated amount by which a plant asset has been depreciated over its useful life is classified as

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

Answer(s): B

Explanation:

Accumulated Depreciation reports the total amount of depreciation expense recognized in all prior periods since the asset(s) were put into service.



Under accrual accounting, which of the following is/are Incorrect?

  1. Revenues are recognized when cash is received.
    II. The reported income is a good indicator of the firm's current performance.
    III. Expenses do not always involve cash flows.
    IV. Revenues and the related costs are matched in the same period.
  2. I only
  3. II & III
  4. III only
  5. All of these answers are correct

Answer(s): A

Explanation:

Under accrual accounting, revenues are recognized when the earnings process behind the revenues is complete and expenses are recognized in the period the goods and services are used for generating income.
Therefore, revenues and expenses do not always involve actual cash flows, though revenues and costs that are related do get matched in the same period whenever such an identification is possible.



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