QUESTION: 1989

Which combination leads to the lowest income tax paid in earlier years of a firm?

Inventory valuationDepreciation

FIFOStraight-line
II.LIFOStraight-line
III.FIFODouble Declining
IV.LIFODouble Declining
IV.
II.
I.
III.

Answer(s): A

Explanation:

In the earlier years, this combination results in the lowest income reported and hence, the lowest taxes.

A firm has a constant pre-depreciation income using assets that last 5 years. The straight-line method results in a rate of return that ________ over the life of the assets. The accelerated methods result in a rate of return that ________ over the life of the assets.

increases, increases
decreases, increases
decreases, decreases
increases, decreases

Answer(s): A

Explanation:

The straight line and all accelerated depreciation methods giving an increasing rate of return on assets over the asset life (the pre-depreciation income is held constant to isolate the effect). This is a mathematical fact which you can easily prove.

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QUESTION: 1991

An asset with a 10-year life has an acquisition cost of 5,000. The firm, using double declining method of depreciation has an accumulated depreciation of 2,440 at the end of year 3 (verify this!). The depreciation expense in year 4 is equal to ________.

Answer(s): C

Explanation:

The book value at the beginning of year 4 = 5,000-2,440 = 2,560. Then, depreciation expense in year 4 = 2/10*book value = 512.

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QUESTION: 1992

The weighted average method is based on the assumption that the cost of merchandise sold should be calculated using the :

lower of cost or market (LCM)
FIFO
LIFO
weighted average cost

Answer(s): D

Explanation:

Under the weighted average method, inventory is priced at the average cost of the goods available for sale (Beginning inventory plus purchases during the period). The cost for the ending inventory under this method is influenced by all the prices paid during the period.

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Free CFA-Level-I Exam Braindumps (page: 498)

QUESTION: 1989

Explanation:

QUESTION: 1990

Explanation:

QUESTION: 1991

Explanation:

QUESTION: 1992

Explanation: