Free CFA-Level-I Exam Braindumps (page: 449)

Page 449 of 991

Which of the following statements is true?

  1. Allocation of plant asset costs, through depreciation, if consistently applied, does not lend itself to serious distortion.
  2. None of these answers.
  3. All of these answers.
  4. Determination of the useful life of an asset, if consistently applied, does not lend itself to serious distortion.
  5. Historical cost valuation of plant assets, if consistently applied, does not lend itself to serious distortion.

Answer(s): E

Explanation:

Determining the useful life of an asset is central to the allocation of its cost and its period-to-period valuation; the same is true with depreciation schedules that are selected. These pose problems in determining the fair value of plant and equipment.



Which of the following is/are true in an inflationary environment?

  1. For income statement purposes, LIFO is preferable to FIFO.
    II. For balance sheet purposes, LIFO is preferable to FIFO.
    III. The weighted average cost method provides a better balance sheet representation than LIFO.
    IV. The weighted average cost method provides a better income statement representation than FIFO.
  2. II, III & IV
  3. II & IV
  4. III only
  5. I, III & IV

Answer(s): D

Explanation:

Remember that for income statement, it is desirable to have the COGS as close to true, current cost, as possible. For balance sheet, the assets must be as close to current, market value, as possible. Hence, for income statement, LIFO preferred to average cost preferred to FIFO. For balance sheet, FIFO preferred to average cost preferred to LIFO.



Deferred credits arise because of:

  1. an over-estimation of assets or earnings, which must now be reversed.
  2. none of these answers.
  3. the concept of accrual accounting.
  4. the use of cash accounting.

Answer(s): C

Explanation:

Deferred credits can be liabilities incurred in the course of current business which are not yet recognized in the income statement or are unearned assets or revenues which have been recognized prematurely, as determined by the matching principle. Examples of these include deferred income taxes and unearned royalties received. In either case, accrual accounting dictates that such "mistakes" be corrected for through the use of deferred credits.



The consistency principle

  1. requires that the company use a selected accounting method period after period
  2. all of these answers are correct
  3. is limited to inventory pricing methods
  4. requires that a company use one inventory method exclusively

Answer(s): A

Explanation:

The consistency principle requires that an accounting procedure, once adopted by a company, remain in use from one period to the next unless users are informed of the change. It is not limited to inventory valuation methods.



Page 449 of 991



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