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Test Prep CFA-Level-I Exam
CFA® Level I Chartered Financial Analyst (Page 149 )

Updated On: 11-Jan-2026
Page 149 of 793
PDF with 3963 Questions

Excerpts from the balance sheet of Milton Corporation as of April 30, 1997 are presented as follows:

Cash $725,000
Accounts receivable (net) $1,640,000
Inventories $2,945,000
Total current assets $5,310,000
Accounts payable $1,236,000
Accrued liabilities $831,000
Total current liabilities $2,067,000

The board of directors of Milton met on May 5, 1997 and declared a quarterly cash dividend in the amount of $200,000 ($0.50 per share). The dividend was paid on May 28, 1997 to shareholders of record as of May 15, 1997.

Assume that the only transactions that affected Milton during May 1997 were the dividend transactions. If the dividend declared by Milton had been a 10% stock dividend instead of a cash dividend, Milton's total shareholders' equity would have been

  1. unchanged by either the dividend declaration or the dividend distribution.
  2. increased by the dividend declaration and unchanged by the dividend distribution.
  3. decreased by the dividend declaration and increased by the dividend distribution.
  4. unchanged by the dividend declaration and decreased by the dividend distribution.
  5. increased by the dividend declaration and decreased by the dividend distribution.

Answer(s): A

Explanation:

The declaration and distribution of a stock dividend involves transferring an amount from retained earnings to common stock. However, the total shareholders' equity remains the same.



When purchased, plant assets are recorded at:

  1. cost
  2. market value
  3. future value
  4. lower of cost or market

Answer(s): A

Explanation:

Fixed assets are recorded at cost, which includes all normal and reasonable expenditures necessary to get the asset in place and ready to use.



If an independent auditor has not become satisfied by means of other auditing procedures with respect to opening inventories, they should

  1. either disclaim an opinion on the statement of income or qualify the opinion thereon, regardless of the degree of materiality of the amounts involved.
  2. either disclaim an opinion on the statement of income or qualify the opinion thereon, depending on the degree of materiality of the amounts involved.
  3. disclaim an opinion or qualify the opinion on the statements as a whole.
  4. express an adverse opinion on the statements taken as a whole when the amount in question is material.

Answer(s): B

Explanation:

If the auditor has become satisfied as to current inventory, the auditor may use alternative procedures to become satisfied as to opening inventories. But if they cannot become satisfied regarding inventories, a qualified opinion or a disclaimer of opinion may be expressed, depending on materiality. Because cost of goods sold is dependent on opening inventories, an unqualified opinion on the income statement is not possible.



The cumulative effect of changing to a new accounting principle on the amount of retained earnings at the beginning of the period in which the change is made should be included in net income of ________.

  1. the period of change and future periods
  2. the period of change
  3. future periods
  4. none of these answers
  5. neither future periods nor the period of change

Answer(s): B

Explanation:

A change from one acceptable method of accounting to another should be accounted for as the cumulative effect of a change in accounting principle. The cumulative effect should be recognized as a component of net income, net of tax effect, in the period of change.



Which of the following is not a current liability?

  1. Allowance for Uncollectible Accounts
  2. Wages Payable
  3. Unearned Revenue
  4. Notes Payable

Answer(s): A

Explanation:

Allowance for Uncollectible Accounts is a contra account to Accounts Receivable, both of which are reported in the current asset section of the balance sheet.



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