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Test Prep CFA-Level-I Exam
CFA® Level I Chartered Financial Analyst (Page 139 )

Updated On: 11-Jan-2026
Page 139 of 793
PDF with 3963 Questions

Costs that can be reasonably associated with specific revenues but not with specific products should be

  1. capitalized and then amortized over a period not to exceed 60 months.
  2. expensed in the period in which the related revenue is recognized.
  3. capitalized and then amortized over a period not to exceed 40 years.
  4. allocated to specific products based on the best estimate of the production processing time.
  5. charged to expense in the period incurred.

Answer(s): B

Explanation:

The expense recognition principle of "associating cause and effect" or "matching" applies when a direct cause and effect relationship can be demonstrated between costs and particular revenues.



Which of the following relationships is true?

  1. Gross profit margin < Net profit margin < Operating profit margin
  2. Gross profit margin < Operating profit margin < Net profit margin
  3. Gross profit margin > Operating profit margin > Net profit margin
  4. Net profit margin > Gross profit margin > Operating profit margin

Answer(s): C

Explanation:

Gross profit = Net sales - COGS
Operating profit = Gross Profit - Sales & General Expenses = EBDIT Net Income = Earnings after depreciation, interest expense and taxes = Operating profit - depreciation - interest expense - taxes
Since gross profit > operating profit > net income, "Gross profit margin > Operating profit margin > Net profit margin" is the correct choice.



A firm's financial data show:

Taxable income 1,500
Taxes paid 500
Non-cash operating expenses 780
Bonds retired 700
Loss on retired bonds 140

Then, the financing cash flow equals ________.

  1. -700
  2. -840
  3. 160
  4. -900

Answer(s): D

Explanation:

The firm's tax rate equals 500/1,500 = 30%. Note that loss on bonds retired is an extraordinary item under US GAAP and presented after-tax. Hence, the total cash spent on retiring bonds = 700 + 140/(1-0.3) = 900. So financing cash flow = -900.



Which of the following is/are FALSE?

  1. Interest expenses that are capitalized are charged against investing cash flows.
    II. Firms that expense interest costs incurred on debt must treat them as financing cash flows.
    III. Firms that expense costs show lower equity than comparable firms that capitalize the costs.
    IV. Capitalization of expenses leads to lower tax payments in the first year.
  2. I, II & IV
  3. II & IV
  4. II & III
  5. III & IV

Answer(s): B

Explanation:

Interest expenses are treated as operating cash flows under US GAAP. Capitalization leads to higher net income since the entire expenses are not charged against it. Due to this, the tax deductions are lower in the first year, leading to higher taxes. The higher income leads to the capitalizing firm having a higher equity. The difference in equity reduces over time to zero.



The deferred income tax account

  1. can be reported as an asset
  2. is reported as a liability if it has a credit balance
  3. is where the difference between income tax expense and income tax payable is reconciled
  4. all of these answers are correct

Answer(s): D

Explanation:

The difference between income tax expense (based on accounting income) and the actual income taxes payable (based on taxable income) is reconciled in an account called deferred income taxes. It can be reported as an asset or a liability, depending on its balance and the circumstances.



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