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Free CFA I Exam Braindumps
CFA Level I Chartered Financial Analyst Questions 1611–1615 (page: 324)

Updated On: 9-Feb-2026
Page 324 of 793
PDF with 3960 Questions

The matching principle requires that

  1. non-operating gains and losses should be netted against each other.
  2. a proportion of each dollar collected will be assumed to be a recovery of cost.
  3. revenues earned and expenses incurred in generating those revenues should be reported in the same income statement.
  4. assets will be matched to the liabilities incurred to purchase them.

Answer(s): C

Explanation:

Performance can be measured only if the related revenues and cost are accounted for in the same period.



One method management can "manipulate" earnings is by

  1. reporting a gain on the sale of subsidiary when the operating income of the firm is showing a loss.
  2. changing from LIFO to any other inventory valuation method.
  3. reporting the full amount of anticipated restructuring costs.
  4. changing from the percentage-of-completion method.
  5. reporting additional losses in bad years, assuming future reported profits will increase.

Answer(s): E

Explanation:

Known as "Big Bath" accounting, by taking all available losses at one time, management believes it can clear all the losses from the profit and loss statement and begin to increase profits.



When preparing a direct method statement of cash flows, the principal component of cash flow from operating activities is

  1. the decrease in accounts receivable.
  2. cash collections.
  3. cash received from short- and long-term borrowings.
  4. the increase in accounts payable.
  5. net income plus depreciation expense.

Answer(s): B

Explanation:

Cash collections is the beginning point and principal component of cash flow from operating activities.



Cash received from the sale of fixed assets is an example of:

  1. cash flows from investing activities
  2. cash flows from operating activities
  3. cash flows from financing activities
  4. cash flows from noncash investing and financing activities

Answer(s): A

Explanation:

Investing activities usually involve activities that affect long-term assets.



Which of the following is/are FALSE under GAAP?

  1. The change in cash balances in consecutive Balance sheets equals the operating cash flow of the firm over that period.
    II. The investing, financing and operating cash flows must together balance out to zero, to preserve the relationship, cash in = cash out.
    III. Dividends received from investments in the stocks of other firms are classified under investing cash flows.
    IV. Interest paid on debt financing is classified as operating cash flow.
  2. I, II & III
  3. II & IV
  4. I, II & IV
  5. I, II, III & IV

Answer(s): A

Explanation:

The change in cash balances of a firm can come about due to investing and financing cash flows, in addition to operating cash flows. Therefore, (I) is false. The relationship cash in = cash out is incorrect since the difference between the two goes into changing the cash balance of the firm. Hence, the operating, investing and financing cash flows need not balance out. It is very important to remember the following points about dividends and interests:
1. Dividends received from stock investments are considered operating cash flows.
2. Dividends paid on equity are considered financing cash flows.
3. Interest payments on debt are considered operating cash flows.
4. Interest received from debt investments are considered operating cash flows.



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