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Free CFA-Level-I Exam Braindumps (page: 485)

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PDF with 3963 Questions

What should an analyst look for when evaluating a firm's cash and cash equivalent position that would cause the firm's cash position to be less liquid?

  1. The amount of stock dividends required during the coming year.
  2. None of these answers.
  3. All of these answers.
  4. Potential limitations on the use of cash such as restricted balances.
  5. The amount of deposit collection float.

Answer(s): D

Explanation:

Companies may have restrictions place upon the disposition of the cash position. For example, a firm may maintain cash equivalents that are earmarked for plant expansion, sinking fund payments, or legally restricted compensation balance requirements. A careful review of the firm's operations must be undertaken to uncover any cash or cash equivalents that are restricted from use in the general operation of the business.



The correction of an error in the financial statements of a prior-period should be reported, net of applicable income taxes, in the current

  1. none of these answers.
  2. income statement after income from continuing operations and after extraordinary items.
  3. income statement after income from continuing operations and before extraordinary items.
  4. retained earnings statement after net income but before dividends.
  5. retained earnings statement as an adjustment of the opening balance.

Answer(s): E

Explanation:

Accounting rules require that prior-period adjustments due to a correction of an error cannot be reported on the current year income statement because they do not affect this year's operations. They are shown as an adjustment to the opening balance of retained earnings.



The deferred income tax account

  1. none of these answers
  2. is always reported as a long-term liability since the tax is not due until the next fiscal year
  3. is reported as an other asset even though it has a credit balance
  4. is where the difference between income tax expense and income tax payable is reconciled

Answer(s): D

Explanation:

The difference between income tax expense (based on accounting income) and the actual income taxes payable (based on taxable income) is reconciled in an account called deferred income taxes.



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 equity 37,432
Average common equity 26,782
Average total liabilities 18,583

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

  1. 11.3%
  2. 3.9%
  3. 5.4%
  4. 6.2%

Answer(s): C

Explanation:

Return on total capital = (Net income + interest expense)/average total capital. The average total capital includes debt, common equity and preferred stock. Note that since Total assets = Total liabilities + Total Equity, the denominator is also equal to total assets. 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 capital = (2,459 + 573)/(37,432 + 18,583) = 5.41%.






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