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Free CFA-Level-I Exam Braindumps (page: 486)

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The construction of cash flow statement using the indirect method requires which of the following?

  1. Income Statement.
    II. Balance Sheet.
    III. Statement of Retained Earnings.
    IV. Statement of Shareholders' Equity.
  2. I & II
  3. I, II & III
  4. I, II & IV
  5. I & III

Answer(s): A

Explanation:

In the indirect method of construction of the cash flow statement, you start with the net income and start adding back non-cash expenses, adjusting for tax effects. In addition, one needs to look at changes in assets and liabilities accounts to back out investing and financing cash flows. Thus, you need both income statement and the balance sheet for the indirect method of cash flow construction.



Which of the following is a long-term liability?

  1. Cost of goods sold
  2. Bonds
  3. Commercial paper
  4. Accounts payable
  5. None of these answers

Answer(s): B

Explanation:

Only bonds would be a long-term liability. Long-term liabilities are repaid over a time frame of greater than one year. Bonds are repaid over many years, whereas accounts payable and commercial paper are current liabilities (repaid over less than one year); cost of goods sold is an expense not a liability.



According to FASB, initial franchise fees should be recognized as income when

  1. the franchisee shows the ability to pay the fee.
  2. the franchisor has substantially performed or satisfied all material services and conditions.
  3. the franchisor has collected the majority of fee in cash.
  4. the franchisor bills the franchisee.

Answer(s): B

Explanation:

Accounting and reporting standards for franchisors require that revenue be recognized when the franchisor has substantially performed or satisfied all material services and conditions.



The retail industry has __________ asset turnover ratio compared to that of a capital intensive industry like the auto industry.

  1. a higher
  2. about the same
  3. a higher and lower are both possible
  4. a lower

Answer(s): A

Explanation:

Total asset turnover = net sales/average total assets Since the auto industry is highly capital intensive compared to the retail industry, it require far more capital assets to generate the same revenues as the retail industry.






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