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CFA-Level-I: CFA® Level I Chartered Financial Analyst
Free Practice Exam Questions (page: 65)
Updated On: 2-Jan-2026

Page 65 of 496
PDF with 3963 Questions

Which of the following best describes retained earnings?

  1. All of these answers.
  2. None of these answers.
  3. Retained earnings represent the cumulative net profits a firm since inception.
  4. Retained earnings represent the sum total of cash obtained from the sale of common stock to investors.
  5. Retained earnings represent the cumulative net profits of a firm since inception, minus cumulative dividends paid to common stockholders.

Answer(s): E

Explanation:

Retained earnings represent the earned capital of a firm. It consists of the accumulated undistributed earnings (net profits, less cash dividends) of a firm since inception.



Which of the following would be reported as an extraordinary item?

  1. uninsured loss from a flood
  2. gain or loss from passing of a new law
  3. all of these answers are correct
  4. gain or loss from early retirement of debt

Answer(s): C

Explanation:

An item must be both unusual and infrequent (and material in amount) to be classified as extraordinary.



Permanent earnings refers to

  1. the net cash flow plus the change in market value of the firm's net assets.
  2. the amount of earnings that can be paid out as dividends without changing the value of the firm.
  3. the level of earnings that can be maintained in the future given the firm's capital investment.
  4. the amount that can be normally earned and equals the market value of the firm's assets times the firm's required rate of return.
  5. the average earnings the firm generates over a specified period.
  6. none of these answers.

Answer(s): D

Explanation:

Permanent earnings is similar to economic earnings; it is the base to which a multiple is applied to arrive at a "fair price."



If the beginning inventory is overstated and the ending inventory is understated, which of the following is/are true:

  1. COGS is understated
    II. COGS is overstated
    III. Income is overstated
    IV. Income is understated
  2. I & III
  3. IV only
  4. II only
  5. II & IV

Answer(s): D

Explanation:

COGS = Beginning inventory - Ending inventory + Purchases Hence, if BI is overstated and EI understated, COGS is overstated, implying income is understated. It should be remembered that implicit in the use of the above inventory equation is the assumption that there have been no write-downs or write-ups in the inventory.



Which of the following appear(s) on the Income Statement?

  1. Interest revenue.
    II. Depreciation of a machinery.
    III. Employee payroll taxes payable.
    IV. Commissions earned by sales staff.
  2. III only
  3. I, II & IV
  4. II & IV
  5. I & III

Answer(s): B

Explanation:

Employee payroll taxes payable are a current liability.



Which of the following is NOT a change in accounting?

  1. Change in accounting principle
  2. Change in past accounting error
  3. Changing in accounts reporting entity
  4. Changing in accounting estimate

Answer(s): B

Explanation:

Correction to an accounting error is not considered a change in accounting. It is treated as a "prior period adjustment" to the beginning balance of retained earnings. All other are considered accounting changes.



Which of the following assumptions is least likely to be consistent with the concept of efficient capital markets?

  1. Expected returns implicitly include risk in the price of the security.
  2. Market participants correctly adjust prices based on new information.
  3. New information about securities comes to the market in a random fashion.

Answer(s): B



Sal Nunn, CFA, is a portfolio manager at Walker Investments. Nunn sold 300,000 shares of a NASDAQ listed stock on an electronic crossing network in after hours trading because the company announced a significant negative earnings surprise. Indicate whether the third or fourth market best describes the Nunn trade and state whether the NASDAQ market is a call or continuous market.

  1. Nunn's trade is in the third market and NASDAQ is a call market.
  2. Nunn's trade is in the fourth market and NASDAQ is a call market.
  3. Nunn's trade is in the fourth market and NASDAQ is a continuous market.

Answer(s): C



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