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Test Prep CFA-Level-I Exam
CFA® Level I Chartered Financial Analyst (Page 144 )

Updated On: 11-Jan-2026
Page 144 of 793
PDF with 3963 Questions

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

  1. With stock splits and stock dividends, previously reported EPS numbers are retroactively readjusted.
    II. Shares issued for the acquisition of another business are included from the date of issuance.
    III. Shares issued in pooling of interests are assumed to have been outstanding at the beginning of all the periods reported.
  2. II & III
  3. I, II & III
  4. I & III
  5. I only

Answer(s): B

Explanation:

In the computation of basic EPS, one must be careful about the time period for which shares are assumed to be outstanding. This becomes an issue when the firm issues new shares or reacquires outstanding shares during the accounting period. Further, the purpose for which the shares are issued are also of concern since the computation of the weighted number of shares outstanding must be consistent with the logic behind the accounting treatment of the newly issued shares. Hence, when shares are issued for the acquisition of another business, they are considered as equity issued to raise new capital for investment and therefore included from the date of issuance. On the other hand, under pooling of interests method, the merged companies are assumed to have been a combined entity since their respective inceptions. Therefore, when shares are issued under pooling of interests, they are assumed to have been outstanding at the beginning of all the periods reported. Finally, stock splits and stock dividends change the number of shares without any direct impact on earnings. Hence, for consistency, previously reported EPS numbers are retroactively readjusted.



A company is currently being sued by a customer. A reasonable estimate can be made of the costs that would result from a ruling unfavorable to the company, and the amount involved is material. The company's managers, lawyers, and auditors agree that there is a remote likelihood of an unfavorable ruling. This contingency

  1. none of these answers.
  2. should be disclosed as a parenthetical comment in the balance sheet.
  3. should be disclosed as an appropriation of retained earnings.
  4. should be disclosed in a footnote.
  5. need not be disclosed in a footnote.

Answer(s): E

Explanation:

Losses arising from litigation should be accrued if both probable and reasonably estimable, and should be disclosed if reasonably possible. In this case, the likelihood is remote. Therefore, no disclosure is required.



When prices are rising, which of the following inventory valuation methods produces a higher profit?

  1. None of these answers
  2. FIFO
  3. LIFO
  4. Average cost

Answer(s): B

Explanation:

When prices are rising, FIFO will produce the highest profit because the first in (lowest cost) inventory is the first out. This leaves the most recently purchased inventory on hand and since it has the highest cost, ending inventory will have the greatest value which means that cost of goods sold will be the lowest and profits will be the highest (ending inventory = beginning inventory + net purchases - cost of goods sold).



Calculate the book value per share of Quality, Inc.'s common stock, given the following information. Par value of common stock, $2.5 per share; total assets, $19,100,000; retained earnings, $7,375,000; total liabilities, $6,975,000; number of common shares outstanding, 1,250,000; number of preferred sharesoutstanding, 15,000 at $100 par value. Market value of common stock, $24.25. Market value of preferred stock, $106.50.

  1. $8.50
  2. $15.28
  3. $3.80
  4. $9.38
  5. None of these answers

Answer(s): A

Explanation:

The book value of the firm's common stock is $8.50 which is calculated as follows: total assets of $19,100,000, minus total liabilities of $6,975,000, minus, preferred stock outstanding of $1,500,000 (15,000 X $100), divided by the number of common shares outstanding of 1,250,000.



An organization purchased a computer on January 1, 1996 for $108,000. It was estimated to have a 4- year useful life and a salvage value of $18,000. The double-declining-balance method is to be used. The amount of depreciation to be reported for the year ending December 31, 1996 is ________.

  1. ($108,000 - 18,000) (25% X 2)
  2. ($108,000) (25% X 2)
  3. ($108,000 - 18,000) (25% X 1/2)
  4. ($108,000) (25%)
  5. ($108,000) (25% X 1/2)

Answer(s): B

Explanation:

When using a declining-balance method, a constant rate is applied to the changing carrying value of the asset.
The constant rate for the double-declining-balance method is twice the straight-line rate ((100% / 4 years) X 2)



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