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Free CFA-Level-I Exam Braindumps (page: 493)

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PDF with 3963 Questions

Employers' income tax expense consists of the following obligations except:

  1. Federal Income Tax
  2. Social Security Tax
  3. State Unemployment Tax
  4. Medicare Tax

Answer(s): A

Explanation:

Federal income tax is withheld from employee paychecks; it is not an expense to the company.



If a firm recognizes expenses before that dictated by accrual accounting, which of the following best describes the effects on income, total assets and retained earnings?

Income Total assets Retained earnings

  1. Understated Understated Understated
    II. Understated Overstated Understated
    III. Overstated Understated Overstated
    IV. Understated Overstated Overstated
  2. I.
  3. II.
  4. IV.
  5. III.

Answer(s): A

Explanation:

Total assets Retained earnings Understated Understated Overstated Understated Understated Overstated Overstated Overstated
If expenses are recognized before they should be, then income gets understated since you subtract more from the revenues than you should. Hence, retained earnings get understated, leading to an understatement of total equity. Since assets equal liabilities plus equity and liabilities have not been affected, the understatement of equity leads to an understatement of assets.



Which of the following is/are TRUE under GAAP?

  1. The change in the assets of a firm net of the change in liabilities represents a change in the total equity of the firm.
    II. If the assets of the firm increase by $100 and liabilities remain unchanged, the common stock equity increases by $100.
    III. A firm can increase its assets by borrowing money and keeping it as cash reserve.
    IV. A firm can increase its equity by borrowing money and keeping it as cash reserve.
  2. I & II
  3. I, II & III
  4. II only
  5. I & III

Answer(s): D

Explanation:

Use the basic equation, Assets = Liabilities + Total Equity.
II is false since you need "Total equity" comprises of common stock as well as other forms of equity like preferred issues. IV is false since the borrowing increases only the liabilities while the cash increases only the assets, leaving equity unchanged.



A firm has just experienced a LIFO liquidation under inflation. Which of the following could be true?

  1. The firm's purchases were lower than the number of units sold.
    II. The firm experienced a cash drain due to taxes.
    III. The firm's income was understated.
  2. II only
  3. I & III
  4. II & III
  5. I, II & III

Answer(s): D

Explanation:

The LIFO Reserve is defined as the difference between the values of the inventory under FIFO and under LIFO. A decrease in this reserve is referred to as LIFO liquidation. Under the usual case of rising prices, this occurs when units sold exceed units purchased, leading to a "dipping" into the LIFO layers. Since some of the goods sold were purchased at lower prices in previous periods as accounted for by LIFO, COGS gets understated compared to the case where the firm purchases the sold goods in the current period instead of dipping into the LIFO layers. Hence, the firm's income is overstated, leading to higher taxes paid.






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