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Free CFA-Level-I Exam Braindumps (page: 477)

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A firm with a simple capital structure had a net income of 7,700 last year. It had 1,000 common shares outstanding and its reported EPS was 6.6. What was the firm's payment to its preferred stock holders?

  1. 1,300
  2. 900
  3. 1,100
  4. 1,200

Answer(s): C

Explanation:

For a simple capital structure, EPS = (Net Income - Preferred stock dividends)/weighted # of common shares This gives 6.6 = (7700- Preferred stock dividends)/1000. Hence, payment to preferred equity holders = 1,100.



A firm's accountant has mistakenly overstated depreciation by 50 and understated accounts receivables by 35. The firm's tax rate is 40%. Then, which of the following is/are true?

  1. Income is understated by 30.
    II. Income is understated by 50.
    III. Operating cash flow is overstated by 55.
    IV. Operating cash flow is overstated by 85.
  2. I, II & III
  3. II, III & IV
  4. I & III
  5. II & IV

Answer(s): C

Explanation:

If depreciation is overstated by 50, the income is actually understated by 50*(1-tax rate) = 30. The understatement of accounts receivables does not affect the income statement; it understates the reported current assets. It also affects the operating cash flow. Note that operating cash flow = net income + noncash expenses - non-cash revenues - cash reductions in operating accounts Since income is understated by 30, non-cash expense (depreciation) is overstated by 50 and noncash revenue (accounts receivable) is understated by 35, operating cash flow is overstated by -30 + 50 - (-35) = 55.



Prepaid expenses are:

  1. classified as current liabilities on the balance sheet.
  2. advance payments for goods not yet received which extend beyond the current accounting period.
  3. not included in the calculation of a company's working capital.
  4. advance payments for work that the company has not yet performed. The work will be completed within the current accounting period.

Answer(s): B

Explanation:

Prepaid expenses occur when you pay for a service before you actually receive the benefits of the service.



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

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

Answer(s): A

Explanation:

When prices are rising, LIFO will produce the lowest ending inventory value because the last in (highest cost) inventory is the first out. This leaves the oldest inventory on hand and since it was purchased at lower prices, it has the lowest cost and ending inventory will have the lowest value.






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