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CFA® Level I Chartered Financial Analyst Questions 1771–1775 (page: 356)

Updated On: 9-Feb-2026

All of the following statements are true except for:

  1. When inventory balances decrease, cash flows increase.
  2. When short-term debt increases, cash flows increase.
  3. When accounts receivable balances increase, cash flows increase.
  4. When accounts payable balances increase, cash flows increase.

Answer(s): C

Explanation:

As accounts receivable balances increase, there is less income received as cash, therefore cash balances on the statement of cash flows will decrease.



Beginning inventory of 50 units, purchased at $5
50 units purchased at $10
35 units purchased at $9
25 units sold at $15
70 units sold at $12
Tax rate = 40%
Beginning LIFO reserve = $300

Given the above, the net income using Average Cost method is ________.

  1. $279
  2. $224
  3. $381
  4. $249

Answer(s): A

Explanation:

The Average Cost method first calculates the average value of each item in the inventory, including the purchases made during the period. In this case, the total inventory value at cost is 50*5 + 50*10 + 35*9 = $1,065. This is the value of (50 + 50 + 35) = 135 units. Therefore, average cost per unit = 1,065/135 = $7.89.
Total COGS under Average Cost method is then $7.89*95 = $749.44. The total revenue equals 25*15 + 70*12 = 1,215, coming from a sale of 95 units. Thus, pretax income = 1,215 - 749.44 = $465.56. The after-tax income equals 465.56*0.6 = $279.



Which of the following is used to calculate the actual adjustment for bad debt expense for the period?

  1. percent of accounts receivable
  2. percent of net sales
  3. aging
  4. all of these answers

Answer(s): B

Explanation:

The aging and percent of Accounts Receivable methods calculate what the balance of the allowance account should be, however, percent of net sales method calculates the actual expense for the period.



MacDonald Inc. reported net income of $300,000 for 1996. Changes occurred in several balance sheet accounts as follows:

Equipment $25,000 increase
Accumulated depreciation $40,000 increase
Note payable $30,000 increase

Additional information:

During 1996, MacDonald sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.

In December 1996, MacDonald purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.

Depreciation expense for the year was $52,000.

In MacDonald's 1996 statement of cash flows, net cash provided by operating activities is ________.

  1. $347,000
  2. $357,000
  3. $243,000
  4. $340,000
  5. $352,000

Answer(s): A

Explanation:

To calculate cash flows from operating activities, net income will be adjusted for noncash items and working capital. Depreciation of $52,000 is added back to net income of $300,000 and the gain on sale of equipment of $5,000 is subtracted from net income. Therefore, the net cash inflow from operating activities is $347,000.



The following data are available for a firm for a given year:

Net Sales 21,896
Sales & marketing expenses 4,346
Administrative expenses 2,143
COGS 10,084
Depreciation 967
Interest expense 573
Tax rate 35%
Dividends paid 3,445
Preferred Dividends 897
Average total equit y37,432
Average common equity 26,782
Average total liabilities 18,583

In the above example, the firm's return on total equity equals ________.

  1. 8.31%
  2. 4.22%
  3. 6.57%
  4. 5.91%

Answer(s): C

Explanation:

Return on total equity = Net income/average total equity. In the above example, Net Income = Earnings after depreciation, interest expense and taxes = (21,896 - 4,346 - 2,143 - 10,084 - 967 - 573)*(1 - 0.35) = 2,459.
Therefore, Return on total equity = 2,459/37,432 = 6.57%.



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