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Test Prep CFA-Level-I Exam
CFA® Level I Chartered Financial Analyst (Page 142 )

Updated On: 11-Jan-2026
Page 142 of 793
PDF with 3963 Questions

A firm is purchased for more than the fair market value of its assets. The excess is:

  1. considered a "premium paid" and amortized over the life of the acquired assets.
  2. considered as "Goodwill."
  3. written off against the retained earnings on the balance sheet.
  4. treated as an extraordinary loss & presented net of taxes on the income statement.

Answer(s): B

Explanation:

Goodwill is defined as the price paid in excess of the fair market value of the assets of the target firm.



When analyzing the balance sheet, which of the following is an argument against using LIFO in times of rising prices?

  1. Neither of these answers is correct.
  2. Both of these answers are correct.
  3. Under LIFO, ending inventory will be overstated.
  4. Under LIFO, ending inventory is valued at the oldest prices, an unrealistic valuation.

Answer(s): D

Explanation:

LIFO values ending inventory at the oldest prices, thus in times of rising prices, inventory will be understated.
This results in reporting an unrealistic valuation of the company's inventory.



Cash outflows for payment of cash dividends is an example of:

  1. cash flows from financing activities
  2. cash flows from investing activities
  3. cash flows from noncash investing and financing activities
  4. cash flows from operating activities

Answer(s): A

Explanation:

Providing stockholders with a return on their investment in the form of a cash dividend is a financing activity.



Why do the corporation's directors declare stock dividends?

  1. to increase the number of shares outstanding
  2. all of these answers are correct
  3. to keep the market value of the company's stock affordable
  4. to provide tangible evidence of management's confidence in the company's strong performance

Answer(s): B

Explanation:

Declaring a stock dividend will increase the number of shares outstanding and thereby keep the per share price low enough to be an attractive investment. Stock dividends may also show the company management's confidence in the present and future performance of the company.



The cash flow statement provides more objective information about all of the following, except

  1. trends in cash flow components.
  2. management decisions regarding financial policy, dividend policy, and investment for growth.
  3. a firm's ability to generate cash flows from operations.
  4. cash consequences of investing and financing decisions.
  5. the amount a firm can be leveraged.

Answer(s): E

Explanation:

In this case balance sheet data must be used to determine the answer.



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