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Test Prep CFA-Level-I Exam
CFA® Level I Chartered Financial Analyst (Page 140 )

Updated On: 11-Jan-2026
Page 140 of 793
PDF with 3963 Questions

In periods of rising prices, which inventory costing method results in the smallest income tax expense?

  1. Average cost
  2. Perpetual
  3. FIFO
  4. LIFO

Answer(s): D

Explanation:

LIFO assigns the largest dollar value amounts to COGS when purchase prices are rising, thus resulting in lower net income and lower income taxes.



Patterson Company has the following information of one of its vehicles purchased on January 1, 1992:

Vehicle cost $50,000
Useful life, years, estimated 5
Useful life, miles, estimated 100,000
Salvage value, estimated $10,000

Actual miles driven:

1992 30,000
1993 10,000
1994 15,000
1995 25,000
1996 12,000

No estimates were changed during the life of the asset. The 1994 depreciation expense using the sum-of-

years'-digits (SYD) method was ________.

  1. $13,333
  2. $8,000
  3. $10,667
  4. $10,000
  5. $6,000

Answer(s): B

Explanation:

SYD depreciation is calculated on a constant depreciable base equal to $40,000 ($50,000 original cost -10,000 salvage value), multiplied by the SYD fraction. The denominator is the sum of the digits of the total years of the expected useful life (1+2+3+4+5=15). The SYD fraction's numerator equals the remaining years. For 1994, the fraction is 3/15, and depreciation expense is $8,000 ($40,000 X 3/15).



Under the accrual basis of accounting, which of the following statements is true?

  1. Reported net income provides a measure of operating performance.
    II. Revenue is recognized when cash is received, and expenses are recognized when payment is made.
    III. Cash inflows are recognized when they are received, and cash outflows are recognized when they are made.
  2. I only
  3. I, II and III
  4. III only
  5. I and III

Answer(s): D



Valuation of PP&E and natural resources emphasizes all of the following accounting objectives except ________.

  1. accounting for monies invested in assets
  2. historical cost
  3. conservatism principle
  4. reality

Answer(s): D

Explanation:

The financials portray historical information; they do not paint a picture of today.



A firm has a net profit margin of 25%. Its total asset turnover equals 1.3 and equity turnover equals 2.1. The firm's ROE and financial leverage equal ________.

  1. 28.6%, 1.47
  2. 43.2%, 1.33
  3. 52.5%, 1.62
  4. 39.8%, 0.62

Answer(s): C

Explanation:

ROE = net income/equity = (net income/sales)*(sales/equity) = net profit margin * equity turnover = 25%*2.1 = 52.5% Financial Leverage = Total assets/equity = (total assets/sales)*(sales/equity) = (1/asset turnover)*(equity turnover) = 2.1/1.3 = 1.62.



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