Free CFA-Level-II exam questions in PDF & AI Tutor

QUESTION: 41 Exam Topic: 1, Financial Reporting and Analysis

Tobin Yoakam, CFA, is analyzing the financial performance of Konker Industries, a U.S. company which is publicly traded under the ticker KONK. Yoakam is particularly concerned about the quality of Konker's financial statements and its choices of accounting methodologies.

Below is a summary of Konker's financial statements prepared by Yoakam.

Konker has an operating lease for several of its large machining tools. The lease term expires in five years, and the annual lease payments are $2 million. The applicable interest rate on the operating lease is 9%. Yoakam believes that the operating lease should be capitalized and treated as a finance lease. For purposes of adjusting the financial statements, Yoakam believes that the machining tools should be depreciated using straight-line depreciation with a salvage value of $3 million.

At the beginning of 20X8, Konker formed a qualified special purposes entity (QSPE) and sold a portion of its accounts receivables to the QSPE. The total amount of accounts receivables sold to the QSPE was $13.5 million. Yoakam has noted in his research that the Financial Accounting Standards Board (FASB) is considering the elimination of qualified special purposes entities.

Konker has three major operating divisions: Konker Industrial, Konker Defense, and Konker Capital. Yoakam has computed the EBIT margin for each division over the last three years as well as the ratio of the percentage of total capital expenditures to the percentage of total assets for each division.

Since Yoakam is concerned about the quality of Konker's earnings, he decides to analyze the accrual ratios using the balance sheet approach. The table below contains the last three years of accrual ratios for Konker and the industry average.

Regarding the three operating divisions of Konker, Yoakam should be most concerned that:

Konker is growing the Industrial division over time.
the operating ROA of the Capital division has fallen over the last year.
the ratio of the Capex percent change to the asset percentage is significantly less than one for the Defense division.

Answer(s): A

Explanation:

The fact that Konker is growing the Industrial division most rapidly (highest capex percent to asset percent ratio) is a likely cause for concern and further investigation, since this division has the lowest operating return on assets. The decrease in the operating ROA for the Capital division is not particularly troublesome as it mirrors the pattern for the other divisisions and likely just reflects year-to-year variation in profitability. The fact that the percent of capex for the Defense division is less than its percent of total assets is not a primary cause for concern since that division has a lower operating ROA, and growth in capital assets likely follows contract awards in the defense industry, rather than drives business. Also, the apparent overinvestment in the Industrial division will decrease the capex percent for other divisions, other things equal. (Study Session 7, LOS 26.b)

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QUESTION: 42 Exam Topic: 1, Financial Reporting and Analysis

Tobin Yoakam, CFA, is analyzing the financial performance of Konker Industries, a U.S. company which is publicly traded under the ticker KONK. Yoakam is particularly concerned about the quality of Konker's financial statements and its choices of accounting methodologies.

Below is a summary of Konker's financial statements prepared by Yoakam.

Konker has an operating lease for several of its large machining tools. The lease term expires in five years, and the annual lease payments are $2 million. The applicable interest rate on the operating lease is 9%. Yoakam believes that the operating lease should be capitalized and treated as a finance lease. For purposes of adjusting the financial statements, Yoakam believes that the machining tools should be depreciated using straight-line depreciation with a salvage value of $3 million.

At the beginning of 20X8, Konker formed a qualified special purposes entity (QSPE) and sold a portion of its accounts receivables to the QSPE. The total amount of accounts receivables sold to the QSPE was $13.5 million. Yoakam has noted in his research that the Financial Accounting Standards Board (FASB) is considering the elimination of qualified special purposes entities.

Konker has three major operating divisions: Konker Industrial, Konker Defense, and Konker Capital. Yoakam has computed the EBIT margin for each division over the last three years as well as the ratio of the percentage of total capital expenditures to the percentage of total assets for each division.

Since Yoakam is concerned about the quality of Konker's earnings, he decides to analyze the accrual ratios using the balance sheet approach. The table below contains the last three years of accrual ratios for Konker and the industry average.

Based on the balance sheet accruals ratios, Yoakam would most likely conclude which of the following regarding the earnings of Konker?

The volatile accruals ratios are indicators that Konker may be manipulating earnings.
Konker's earnings quality was lower than its peer group in 20X8 but higher in 20X6 and 20X7.
Konker's earnings quality worsened from 20X6 to 20X8 but was superior to its peer group over the 3-year period.

Answer(s): A

Explanation:

Volatile accruals ratios are an indicator that a firm may be manipulating earnings. Additionally, increasing accruals ratios may be a sign that a firm may be manipulat earnings. Lower accrual ratios represent higher earnings quality. (Study Session 7, LOS26.e)

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QUESTION: 43 Exam Topic: 1, Financial Reporting and Analysis

Galena Petrovich, CFA, is an analyst in the New York office of TRS Investment Management, Inc. Petrovich is an expert in the industrial electrical equipment sector and is analyzing Fisher Global. Fisher is a global market leader in designing, manufacturing, marketing, and servicing electrical systems and components, including fluid power systems and automotive engine air management systems.

Fisher has generated double-digit growth over the past ten years, primarily as the result of acquisitions, and has reported positive net income in each year. Fisher reports its financial results using International Financial Reporting Standards (IFRS).

Petrovich is particularly interested in a transaction that occurred seven years ago, before the change in accounting standards, in which Fisher used the pooling method to account for a large acquisition of Dartmouth Industries, an industry competitor. She would like to determine the effect of using the purchase method instead of the pooling method on the financial statements of Fisher. Fisher exchanged common stock for all of the outstanding shares of Dartmouth.

Fisher also has a 50% ownership interest in a joint venture with its major distributor, a U.S. company called Hydro Distribution. She determines that Fisher has reported its ownership interest under the proportioned consolidation method, and that the joint venture has been profitable since it was established three years ago. She decides to adjust the financial statements to show how the financial statements would be affected if Fisher had reported its ownership under the equity method. Fisher is also considering acquiring 80% to 100% of Brown and Sons Company. Petrovich must consider the effect of such an acquisition on Fisher's financial statements.

Petrovich determines from the financial statement footnotes that Fisher reported an unrealized gain in its most recent income statement related to debt securities that are designated at fair value. Competitor firms following U.S. GAAP classify similar debt securities as available-for-sale.

Finally, Petrovich finds a reference in Fisher's footnotes regarding a special purpose entity (SPE). Fisher has reported its investment in the SPE using the equity method, but Petrovich believes that the consolidation method more accurately reflects Fisher's true financial position, so she makes the appropriate adjustments to the financial statements.

Regarding the prior purchase that was accounted for under the pooling of interests method, had Fisher Global reported this purchase under the acquisition method:

the assets and liabilities of the purchased firm would not be included on Fisher's balance sheet.
balance sheet assets and liabilities of the purchased firm would have been reported at fair value.
reported goodwill could be less depending on the fair value of the identifiable assets and liabilities compared to their book values.

Answer(s): B

Explanation:

The assets and liabilities of the purchased firm are included on the balance sheet of the acquiring firm under either method. Under the pooling method, there is no adjustment of balance sheet asset and liability values to their fair values. Under the acquisition method, assets and liabilities acquired are reported at fair value at the time of the purchase. There is no goodwill reported under the pooling method; the purchase price is not reflected on the balance sheet of the acquiring firm. (Study Session 5. LOS 21.a)

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QUESTION: 44 Exam Topic: 1, Financial Reporting and Analysis

Galena Petrovich, CFA, is an analyst in the New York office of TRS Investment Management, Inc. Petrovich is an expert in the industrial electrical equipment sector and is analyzing Fisher Global. Fisher is a global market leader in designing, manufacturing, marketing, and servicing electrical systems and components, including fluid power systems and automotive engine air management systems.

Fisher has generated double-digit growth over the past ten years, primarily as the result of acquisitions, and has reported positive net income in each year. Fisher reports its financial results using International Financial Reporting Standards (IFRS).

Petrovich is particularly interested in a transaction that occurred seven years ago, before the change in accounting standards, in which Fisher used the pooling method to account for a large acquisition of Dartmouth Industries, an industry competitor. She would like to determine the effect of using the purchase method instead of the pooling method on the financial statements of Fisher. Fisher exchanged common stock for all of the outstanding shares of Dartmouth.

Fisher also has a 50% ownership interest in a joint venture with its major distributor, a U.S. company called Hydro Distribution. She determines that Fisher has reported its ownership interest under the proportioned consolidation method, and that the joint venture has been profitable since it was established three years ago. She decides to adjust the financial statements to show how the financial statements would be affected if Fisher had reported its ownership under the equity method. Fisher is also considering acquiring 80% to 100% of Brown and Sons Company. Petrovich must consider the effect of such an acquisition on Fisher's financial statements.

Petrovich determines from the financial statement footnotes that Fisher reported an unrealized gain in its most recent income statement related to debt securities that are designated at fair value. Competitor firms following U.S. GAAP classify similar debt securities as available-for-sale.

Finally, Petrovich finds a reference in Fisher's footnotes regarding a special purpose entity (SPE). Fisher has reported its investment in the SPE using the equity method, but Petrovich believes that the consolidation method more accurately reflects Fisher's true financial position, so she makes the appropriate adjustments to the financial statements.

Had Fisher Global reported its investment in the joint venture under the equity method rather than under the proportionate consolidation method, it is most likely that:

Reported revenue would have been the same.
Reported expenses would have been higher.
Fisher's net income would not have been affected.

Answer(s): C

Explanation:

Under the proportionate consolidation method, the proportionate share of the purchased firm's revenue and expenses would be reported on Fisher's income statement, increasing both expenses and revenues. Under the equity method, Fisher's revenue and expenses are reported without adjustment, and the proportion of income from the purchased firm is reported separately, so that net income is the same under either method. (Study Session 5, LOS 21.a)

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QUESTION: 45 Exam Topic: 1, Financial Reporting and Analysis

Galena Petrovich, CFA, is an analyst in the New York office of TRS Investment Management, Inc. Petrovich is an expert in the industrial electrical equipment sector and is analyzing Fisher Global. Fisher is a global market leader in designing, manufacturing, marketing, and servicing electrical systems and components, including fluid power systems and automotive engine air management systems.

Fisher has generated double-digit growth over the past ten years, primarily as the result of acquisitions, and has reported positive net income in each year. Fisher reports its financial results using International Financial Reporting Standards (IFRS).

Petrovich is particularly interested in a transaction that occurred seven years ago, before the change in accounting standards, in which Fisher used the pooling method to account for a large acquisition of Dartmouth Industries, an industry competitor. She would like to determine the effect of using the purchase method instead of the pooling method on the financial statements of Fisher. Fisher exchanged common stock for all of the outstanding shares of Dartmouth.
Fisher also has a 50% ownership interest in a joint venture with its major distributor, a U.S. company called Hydro Distribution. She determines that Fisher has reported its ownership interest under the proportioned consolidation method, and that the joint venture has been profitable since it was established three years ago. She decides to adjust the financial statements to show how the financial statements would be affected if Fisher had reported its ownership under the equity method. Fisher is also considering acquiring 80% to 100% of Brown and Sons Company. Petrovich must consider the effect of such an acquisition on Fisher's financial statements.

Petrovich determines from the financial statement footnotes that Fisher reported an unrealized gain in its most recent income statement related to debt securities that are designated at fair value. Competitor firms following U.S. GAAP classify similar debt securities as available-for-sale.

Finally, Petrovich finds a reference in Fisher's footnotes regarding a special purpose entity (SPE). Fisher has reported its investment in the SPE using the equity method, but Petrovich believes that the consolidation method more accurately reflects Fisher's true financial position, so she makes the appropriate adjustments to the financial statements.

Regarding the goodwill on the acquisition of Brown and Sons being considered by Fisher Global, which of the following statements is correct?

It is equal to the excess of the purchase price over the fair value of the identifiable assets and liabilities and must be amortized over no longer than 30 years.
It will be reported as an asset, not amortized, and must be reviewed for impairment at least annually, with same test for impairment under IFRS and U.S. GAAP.
For goodwill that is found to be impaired, the amount of the impairment charge reported is the same under both IFRS and U.S. GAAP.

Answer(s): C

Explanation:

Goodwill is no longer amortized under IFRS or U.S. GAAP. The test for impairment is different under IFRS than under U.S. GAAP. For assets that are judged to be impaired, the calculation of the amount of the impairment charge is the same under both IFRS and U.S. GAAP. (Study Session 5, LOS 21 .b)

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CFA-Level-II Practice Questions, What to Expect and How to Prepare

The CFA Level II Chartered Financial Analyst exam serves as a critical milestone for investment professionals aiming to demonstrate advanced proficiency in asset valuation and portfolio management. Candidates who pursue this certification are typically working as financial analysts, portfolio managers, or investment researchers who need to prove their ability to apply complex financial tools to real-world scenarios. Employers in the global finance sector prioritize this certification because it signals a candidate's deep understanding of the rigorous standards required for ethical and technical financial analysis. By passing this exam, professionals validate their capability to handle the sophisticated demands of modern investment management, which is essential for career advancement in high-stakes financial environments. This certification exam is designed to test not just the retention of information, but the practical application of investment theory in a professional context.

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CFA CFA-Level-II Exam Actual Questions CFA Level II Chartered Financial Analyst (Page 10 )

QUESTION: 41 Exam Topic: 1, Financial Reporting and Analysis

Explanation:

QUESTION: 42 Exam Topic: 1, Financial Reporting and Analysis

Explanation:

QUESTION: 43 Exam Topic: 1, Financial Reporting and Analysis

Explanation:

QUESTION: 44 Exam Topic: 1, Financial Reporting and Analysis

Explanation:

QUESTION: 45 Exam Topic: 1, Financial Reporting and Analysis

Explanation:

CFA-Level-II Practice Questions, What to Expect and How to Prepare

What the CFA-Level-II Exam Covers

Are These Real CFA-Level-II Exam Questions?

How to Prepare for the CFA-Level-II Exam

What to Expect on Exam Day

Who Should Use These CFA-Level-II Practice Questions

CFA CFA-Level-II Exam Actual Questions
CFA Level II Chartered Financial Analyst (Page 10 )