QUESTION: 1821

Firm A currently shows assets worth 2,000 and equity of 1,500. During the year, it capitalized interest expense worth 200, of which 50 was depreciated/amortized. The firm faces a tax rate of 50%. If the firm had expensed the interest paid, which of the following would be true?

Its assets would be stated at 1,750.
Its assets would be stated at 1,850.
Its assets would be stated at 2,000.
Its assets would be stated at 1,800.

Answer(s): B

Explanation:

If the firm's assets without capitalization equal A, then we have A+200-50 = 2,000. Hence, A = 1,850.

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QUESTION: 1822

Contingent losses are recognized:

when they actually occur during a contingency.
II. only if it is probable that a loss will occur.
III. only if the amount of the loss can be reasonably estimated.
IV. at the management's discretion.
II, III & IV
I only
II & III
II & IV

Answer(s): A

Explanation:

II and III must hold together for a recognition of contingent losses to take place. GAAP defines "probable" as "greater than 50% chance." Since this is subjective, the management has considerable discretion on the timing of recognition.

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QUESTION: 1823

A firm has a cash conversion cycle of 31.6 days. It turns over its inventory on average in 43.1 days and pays off its payables in an average of 23.2 days. Its receivables turnover ratio equals ________.

31.2
42.3
14.9
25.1

Answer(s): A

Explanation:

CCC = (Average receivables collection period) plus (Average inventory processing time) minus (Average payables payment period).
Hence, 31.6 = Average receivables collection period + 43.1 - 23.2, giving Average receivables collection period = 31.6 - 43.1 + 23.2 = 11.7 days. Since Average receivables collection period = 365/receivables turnover, the receivables turnover ratio equals 365/11.7 = 31.2.

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QUESTION: 1824

The cash conversion cycle equals:

receivables days - inventory processing days + payables payment period.
receivables days - inventory processing days - payables payment period.
receivables days + inventory processing days + payables payment period.
receivables days - payables payment period + inventory processing days.

Answer(s): D

Explanation:

The cash conversion cycle is a measure of how long the cash is tied up in short term loans and credits. These short-term financing items include receivables, inventory and accounts payable. The first two of these represent sources of cash while accounts payable represent a future drain of cash. So the cash conversion cycle is defined as: CCC = (Average receivables collection period) plus (Average inventory processing time) minus (Average payables payment period). A low cash conversion cycle could indicate that you are either collecting your debts or churning inventory faster or you are paying your bills slower.

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Free CFA-Level-I Exam Braindumps (page: 456)

QUESTION: 1821

Explanation:

QUESTION: 1822

Explanation:

QUESTION: 1823

Explanation:

QUESTION: 1824

Explanation: