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Test Prep CFA-Level-I Exam
CFA® Level I Chartered Financial Analyst (Page 141 )

Updated On: 11-Jan-2026
Page 141 of 793
PDF with 3963 Questions

When compared to the percentage-of-completion method, the completed contract method

  1. reports larger total assets.
  2. reports higher net assets.
  3. reports higher cash flows.
  4. reports income earlier.
  5. uses higher estimates of selling prices.

Answer(s): A

Explanation:

The completed contract method reports larger total assets because it accumulates inventory.



In the direct method statement of cash flows, the primary component of investing cash flow is typically

  1. dividend payments.
  2. long-term investments in securities.
  3. capital expenditures for long-term assets.
  4. repayment of debt.
  5. investments in affiliates.

Answer(s): C

Explanation:

Capital expenditures for long-term assets such as plant and machinery are usually the primary component of investing cash flow.



Items reported as prior-period adjustments

  1. do not include the effect of a mistake in the application of accounting principles as this is accounted for as a change in accounting principle rather than a prior-period adjustment.
  2. do not affect the presentation of prior-period comparative financial statements.
  3. are reflected as adjustments of the opening balance of the retained earnings of the earliest period presented.
  4. none of these answers.
  5. do not require further disclosure in the body of financial statements.

Answer(s): C

Explanation:

Prior-period adjustments are made for the correction of errors. All the effects of errors on prior-period financial statements are reported as adjustments to beginning retained earnings for the earliest period presented in the retained earnings statement.



Which of the following is/are true about computation of Basic EPS?

  1. Reacquired shares are excluded from the date of acquisition.
    II. Shares issued in the purchase of assets are assumed to have been outstanding for the entire period.
    III. Shares issued in mergers are assumed to have been outstanding from the date of issuance.
  2. I only
  3. II & III
  4. I & II
  5. I, II & III

Answer(s): A

Explanation:

Weighted average shares used in EPS computations are calculated using the following rules:
1. Reacquired shares are excluded from the date of acquisition.
2. Shares issued in the purchase of assets are included from the date of issuance.
3. Shares issued in mergers are assumed to have been outstanding for all periods for which EPS numbers are presented.



At December 31, 1996, Davis Inc. awaits judgment on a lawsuit for a competitor's infringement of Davis' patent. Legal counsel believes it is probable that Davis will win the suit and indicated the most likely award together with a range of possible awards. How should the lawsuit be reported in Davis' 1996 financial statements?

  1. None of these answers.
  2. Neither in note disclosure nor by accrual.
  3. In note disclosure only.
  4. By accrual for the lowest amount of the range of possible awards.
  5. By accrual for the most likely award.

Answer(s): C

Explanation:

A loss contingency is recognized but not a gain contingency following the principle of conservatism. A gain contingency is only disclosed in the notes until the settlement is realized.



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