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CFA-Level-I: CFA® Level I Chartered Financial Analyst
Free Practice Exam Questions (page: 64)
Updated On: 2-Jan-2026

Page 64 of 496
PDF with 3963 Questions

To carry out a comparative analysis of a firm's financial statements over a period of more than 3-4 years, one should use ________.

  1. year-to-year change analysis
  2. horizon analysis
  3. ratio analysis
  4. index-number trend analysis

Answer(s): D

Explanation:

To carry out a comparative statement analysis over a long period of time, you can express the financial statement numbers in terms of a common base. This base could be one of the years for which financial statements are available or can be arbitrarily set to a number like 100. This process then converts the financial statement quantities into indices and these can be analyzed more conveniently.



A firm's financial audit ensures all of the following EXCEPT:

  1. The company is managing its risks within the guidelines specified in its charter.
  2. There are adequate controls and checks in place in its accounting systems.
  3. There are no material errors or omissions in its financial reports.
  4. The management is not misstating its performance.

Answer(s): A

Explanation:

It is not a financial audit function to check on the reasonableness of the risks undertaken by the institution.



The loss from an uncollectible account is:

  1. an asset
  2. a liability
  3. a regular expense of doing business
  4. a reduction in revenue

Answer(s): C

Explanation:

The benefit from selling on credit to customers far outweighs the cost of losses from uncollectible accounts.
These losses are a regular expense of doing business.



Topaz Metals Inc. produces precious metals from its mining operations. The selling price for its product is reasonably assured, the units are interchangeable, and the costs of selling and distributing the product are insignificant. In order for Topaz to recognize revenue as early in the revenue cycle as is permitted under generally accepted accounting principles, the revenue recognition method that Topaz should use is the ________.

  1. percentage-of-completion method
  2. production method
  3. cash method
  4. completed-contract method
  5. cost recovery method

Answer(s): B

Explanation:

Revenue is recognized when the conditions of "realized" or "realizable" and earned are met. If products are readily realizable because they are salable at reliably determinable prices without significant effort, revenues may be recognized at completion of production.



The following financial data on CashCow, Inc. have been taken from its financial statements for 1996:

  1. Dividends paid $25,000
  2. Sale of land $64,000
  3. Inventory purchases $29,000
  4. Purchase of a warehouse $208,000
  5. Bonds issued $90,000
    F Dividends received from investments $17,000
  6. Interest paid on bonds $2,400
  7. Salaries paid $107,400
  8. Cash collection from customers $28,400
  9. Loss on land sale $18,000
  10. Beginning cash balance $312,000
    In the above question, the ending cash balance of the firm was ________.
  11. $157,600
  12. $121,600
  13. $139,600
    N. $172,400

Answer(s): C

Explanation:

Note that the loss on equipment is a non-cash event. Using the direct method, beginning cash balance + net cash inflow = ending cash balance Hence, ending balance = 312,000 + (-25,000+64,000-29,000 - 208,000 + 90,000 + 17,000 - 2,400 - 107,400 + 28,400) = $139,600.



The par value of a common stock represents

  1. the estimated market value of the stock when it was issued.
  2. none of these answers.
  3. the liability ceiling of a shareholder when a company undergoes bankruptcy proceedings.
  4. the total value of the stock that must be entered in the issuing corporation's records.
  5. the amount that must be recorded on the issuing corporation's record as paid-in capital.

Answer(s): C

Explanation:

Par value represents a stock's legal capital. It is an arbitrary value assigned to stock before it is issued. Par value represents a shareholder's liability ceiling because, as long as the par value has been paid in to the corporation, the shareholder obtains the benefits.



Which of the following is NOT a revenue recognition method when there is uncertainty surrounding the realizability of income?

  1. Completed Contract Method
  2. Cost Recovery Method
  3. Installment Sales Method
  4. Real Estate Method

Answer(s): A

Explanation:

The completed contract method is used for revenue recognition in the case of long-term contracts. In particular, it is chosen instead of the percentage-of-completion method if there are no reliable measures of the degree to which the contract obligations have been fulfilled.



Which of the following would be considered a liability that arises from operating activities?

  1. Taxes payable
  2. All of these answers
  3. Unearned income
  4. Accounts payable
  5. Accrued salaries

Answer(s): B

Explanation:

All of these answers represent liabilities that originate from the operation of a business; i.e., from the normal course of operating a business. Liabilities that arise from "operations" typically do not require compensation in the form of interest. This can be contrasted with liabilities that arise from financing activities where the lender requires the payment of interest to compensate for the extension of credit.



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