Free CFA-Level-I Exam Braindumps (page: 532)

Page 532 of 991

Which of the following relationships is/are correct:

  1. change in assets + change in liabilities = change in equity.
    II. change in retained earnings = net income + dividends paid.
    III. assets - liabilities = retained earnings + contributed capital.
    IV. assets = liabilities + revenues - expenses.
  2. I, II & III
  3. III only
  4. I, II, III & IV
  5. II & III

Answer(s): B

Explanation:

The basic accounting equation is Total assets = Total liabilities + Total Equity. In I & II, the "plus" should be "minus."



When the Percentage of Sales method is used, the estimated bad debt expense is calculated by:

  1. multiplying net sales on account times the percentage
  2. multiplying total sales on account times the percentage
  3. subtracting the percentage of net sales on account from the balance of Allowance for Uncollectible Accounts
  4. dividing total sales on account by the percentage

Answer(s): A

Explanation:

This method bases the period adjustment on a percent of net sales on account for the period.



The following data are available for a firm for a given year:

Net Sales 21,896
Sales & marketing expenses 4,346
Administrative expenses 2,143
COGS 10,084
Depreciation 967
Interest expense 573
Tax rate 35%
Dividends paid 3,445
Preferred Dividends 897
Average total equity 37,432
Average common equity 26,782
Average total liabilities 18,583

In the above example, the firm's return on common equity equals ________.

  1. 5.83%
  2. 4.77%
  3. 6.12%
  4. 4.38%

Answer(s): A

Explanation:

Return on common equity = (Net income - preferred dividends)/average common equity. In the above example, Net Income = Earnings after depreciation, interest expense and taxes = (21,896 - 4,346 - 2,143 - 10,084 - 967 - 573)*(1 - 0.35) = 2,459. Therefore, Return on common equity = (2,459 - 897)/26,782 = 5.83%.



A firm has just acquired a long-term asset with a useful life of 5 years. Its acquisition cost was $65,000 and its salvage value is estimated at $10,000. If the firm uses straight-line depreciation method, what's the depreciation expense recognized in Year 3?

  1. $10,600
  2. $14,500
  3. $11,000
  4. $13,000

Answer(s): C

Explanation:

In Straight-line method, depreciation is constant at (1/n)*(acquisition cost - salvage value). In this case, depreciation = (1/5)*(65,000-10,000)=$11,000.



Page 532 of 991



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