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Test Prep CFA-Level-I Exam
CFA® Level I Chartered Financial Analyst (Page 148 )

Updated On: 11-Jan-2026
Page 148 of 793
PDF with 3963 Questions

Which of the following items is deducted from net income to arrive at cash flow from operations when using the indirect method?

  1. depreciation expense
  2. decrease in accounts receivable
  3. decrease in accounts payable
  4. amortization expense

Answer(s): C

Explanation:

A decrease in accounts payable is an outflow.



The peaks and valleys of the business cycle tend to be smoothed out using which inventory method?

  1. weighted average
  2. LIFO
  3. gross profit method
  4. FIFO

Answer(s): B

Explanation:

When prices are moving either upward or downward, the cost of goods sold (under LIFO) will show costs closer to the price level at the time the goods were sold. Therefore the LIFO method tends to show a smaller net income during inflationary times and a larger net income during deflationary times than other methods of inventory valuation.



Profit margin is a ratio that:

  1. shows the return on net sales
  2. is calculated as net sales divided by operating expenses
  3. yields the company's financial position at a point in time
  4. compares total assets to net sales

Answer(s): A

Explanation:

Profit margin, also called return on net sales, is calculated by dividing net income by net sales. This ratio measures the average portion of each dollar of revenue that ends up as profit.



Tracy company reports the following in its statement of cash flows:

Net Income $1,000
Depreciation and Amortization 350
Decrease (Increase) in Accounts receivable (10)
Decrease (increase) in inventory 200
Decrease (increase) in prepaid expenses 80
Increase (decrease) in trade payables (300)
Increase (decrease) in taxes payable 75
Cash Flow from operations 1,395

If Tracy shows depreciation expense of $275 in its income statement, cash paid for amortization is ________.

  1. $75
  2. $525
  3. not determinable
  4. $0

Answer(s): D

Explanation:

No cash outflow.



The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.

Net Income $50,000
Provision for bad debts $2,000
Increase in Inventory $1,000
Increase in accounts payable $2,000
Purchase of new equipment $15,000
Sale of equipment for $10,000 gain $20,000
Depreciation expense $5,000
Repurchase of common stock $10,000
Payment of dividend $4,000
Interest payment $3,000

What is change in cash?

  1. $39,000
  2. $45,000
  3. $46,000
  4. $49,000

Answer(s): A

Explanation:

$50,000 + (-$1,000 + $2,000 - $15,000 + $20,000 - $10,000 - $4,000 - $3,000)



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