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CFA® Level I Chartered Financial Analyst Questions 1546–1550 (page: 311)

Updated On: 9-Feb-2026

Which of the following is considered a characteristic of a liability?

  1. A liability represents a claim against a company's present and future assets and resources.
  2. A liability requires the rendering of future services.
  3. All of these answers.
  4. A liability requires the payment of money.
  5. A liability represents a claim that is usually senior to the holders of equity securities.

Answer(s): C

Explanation:

By definition, a liability is a financial obligation that requires the payment of money, or the rendering of future services. It is a claim against the business that must be satisfied in one way or another. Lastly, liabilities are claims that have a higher level of priority than equity as it relates to the distribution of income, or assets.



The formula for calculating profit margin is

  1. total sales divided by total expenses
  2. net sales minus total expenses divided by net income
  3. net income divided by net sales
  4. none of these answers is correct

Answer(s): C

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.



"Deferral" refers to:

  1. a postponement of recognition of income until the earnings process is actually completed.
  2. none of these answers.
  3. recognition of an asset for all payments made for goods and services not yet delivered.
  4. postponement of tax payments through the use of tax credits.

Answer(s): A

Explanation:

"Deferral" is the accounting process of recognizing a liability when payments are made in advance of the earnings process. Over time, as the earnings process proceeds, income is recognized and liabilities are decreased.



The following information was taken from the accounting records of Boston Corp. for the year ended December 31, 1996 (in $000):

Proceeds from issuance of preferred stock F$4,000
Dividends paid on preferred stock F400
Bonds payable converted to common stock NC2,000
Payment for purchase of machinery I500
Proceeds from sale of plant building I1,200
2% stock dividend on common stock NC300
Gain on sale of plant building I200

The net cash flows from investing and financing activities that should be presented on Boston's statement of cash flows for the year ended December 31, 1996 are, respectively (in $000) ________.

  1. $700 and $3,600
  2. $700 and $3,900
  3. $700 and $4,000
  4. $900 and $3,900
  5. $900 and $3,600

Answer(s): A

Explanation:

Investing activities include the acquisition and disposal of all long-term assets. Thus, the purchase of machinery and sale of plant building for a total of $700 inflow from investing (-$500 + 1,200). Financing activities include the issuance and repurchase of shares, dividends and changes in long- term liabilities. In this case, the issuance of preferred stock and payment of dividends for a total of $3,600 inflow from financing ($4,000-400).
The conversion of bonds into common stock and the stock dividend do not affect cash.



Under GAAP, which of the following costs can be capitalized?

  1. drilling costs for oil wells
  2. public relations expense to develop goodwill
  3. research and development
  4. none of these answers

Answer(s): A

Explanation:

Drilling costs can be either expensed under Successful Efforts method or capitalized under the Full Cost method. R&D costs cannot be capitalized unless the costs are incurred on assets that have alternative uses.
Similarly, internally developed Goodwill cannot be capitalized in the form of an asset. Only if it is purchased during an acquisition can it appear on the balance sheet in a capitalized form.



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