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Test Prep CFA-Level-I Exam
CFA® Level I Chartered Financial Analyst (Page 147 )

Updated On: 11-Jan-2026
Page 147 of 793
PDF with 3963 Questions

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

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

Answer(s): B

Explanation:

When prices are rising, FIFO will produce the highest ending inventory value because the first in (lowest cost) inventory is the first out. This leaves the most recently purchased inventory on hand and since it was purchased at higher prices, it has the highest cost and ending inventory will have the greatest value.



Which of the following is/ are true?

  1. Assets = Equity + Liabilities
    II. Equity = Retained earnings + Dividends Payable
    III. Assets + Liabilities = Equity
    IV. Assets = Liabilities - Equity
  2. II & IV
  3. I only
  4. I & II
  5. III only

Answer(s): B

Explanation:

The basic accounting equation states that Assets = Liabilities + Owners' Equity.



Which of the following would have an effect on cash flow from operations?

  1. Sale of machinery for $50,000 with a net book value of $35,000.
    II. Purchase of supplies on credit.
    III. Remittance by customer in payment of goods purchased last accounting period.
    IV. Lease payment on machinery, which is accounted for as a capital lease.
  2. I, II and III
  3. I, III and IV
  4. III and IV
  5. I and III

Answer(s): C



Which of the following is/are true about liquidity ratios, all else equal?

  1. The cash ratio increases as average receivables increase.
    II. The quick ratio is a more conservative liquidity ratio than the current ratio.
    III. Liquidity ratios decrease as total liabilities decrease.
  2. III only
  3. II only
  4. I, II & III
  5. I & III

Answer(s): B

Explanation:

Receivables are not part of the cash ratio and hence, changes in receivables do not directly affect the cash ratio. The quick ratio does consider receivables in addition to cash and marketable securities but ignores all other current assets. Thus, it is more conservative than the current ratio.



Which of the following is/are true about stock dividends?

  1. stock dividends lead to a decrease in the retained earnings account.
    II. large stock dividends are valued at their par value.
    III. small stock dividends are valued at their fair market value at the time of issuance.
  2. II & III
  3. I & III
  4. I, II & III
  5. I only

Answer(s): C

Explanation:

Stock dividends are given to move retained earnings into capital accounts and hence represent a permanent capitalization of earnings. In that sense, stock dividends do not have any economic significance but are an accounting bookkeeping device. The recapitalization does have legal implicationsfor future distributions since the retained earnings account is the primary source of cash dividends and other accounts are more difficult to dip into for distributions. If the stock dividend is less than 20-25%, the additional stocks are valued at fair market value on the declaration date and the resultant amount moved from retained earnings account to the "par-value" account and the "additional paid-in capital" account. Larger stock dividends are valued at par.



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