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CFA-Level-I: CFA® Level I Chartered Financial Analyst
Free Practice Exam Questions (page: 70)
Updated On: 2-Jan-2026

Page 70 of 496
PDF with 3963 Questions

Which of the following relationships is/are correct:

  1. change in assets + change in liabilities = change in equity.
    II. change in retained earnings = net income + dividends paid.
    III. assets - liabilities = retained earnings + contributed capital.
    IV. assets = liabilities + revenues - expenses.
  2. I, II & III
  3. III only
  4. I, II, III & IV
  5. II & III

Answer(s): B

Explanation:

The basic accounting equation is Total assets = Total liabilities + Total Equity. In I & II, the "plus" should be "minus."



When the Percentage of Sales method is used, the estimated bad debt expense is calculated by:

  1. multiplying net sales on account times the percentage
  2. multiplying total sales on account times the percentage
  3. subtracting the percentage of net sales on account from the balance of Allowance for Uncollectible Accounts
  4. dividing total sales on account by the percentage

Answer(s): A

Explanation:

This method bases the period adjustment on a percent of net sales on account for the period.



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 common equity equals ________.

  1. 5.83%
  2. 4.77%
  3. 6.12%
  4. 4.38%

Answer(s): A

Explanation:

Return on common equity = (Net income - preferred dividends)/average common equity. 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 common equity = (2,459 - 897)/26,782 = 5.83%.



A firm has just acquired a long-term asset with a useful life of 5 years. Its acquisition cost was $65,000 and its salvage value is estimated at $10,000. If the firm uses straight-line depreciation method, what's the depreciation expense recognized in Year 3?

  1. $10,600
  2. $14,500
  3. $11,000
  4. $13,000

Answer(s): C

Explanation:

In Straight-line method, depreciation is constant at (1/n)*(acquisition cost - salvage value). In this case, depreciation = (1/5)*(65,000-10,000)=$11,000.



Which of the following is/are differences between depreciation and depletion?

  1. Depletion can be applied only to natural resources while depreciation can be applied to most production resources.
    II. The amount of depletion depends upon total production but the amount of depreciation need not be so dependent.
    III. Depreciation expenses conform with accrual accounting while depletion expenses conform with cost recovery accounting.
  2. II & III
  3. I & II
  4. I, II & III
  5. none of these answers

Answer(s): B

Explanation:

Depletion expenses also conform with accrual accounting.



Why should the analyst place special emphasis in their assessment of cash balances?

  1. Cash represents the point in a firm's operating cycle where management has maximum discretion with the deployment and use of its resources.
  2. Cash is a company's most liquid asset.
  3. All of these answers.
  4. Cash is typically the only asset that is available to meet a firm's financial obligations.
  5. None of these answers.

Answer(s): C

Explanation:

All of these answers are correct because any assessment of a firm's liquidity should be focused on a firm's ability to meet its near-term liabilities. While inventory may be sold, it is subject to shrinkage through loss of value, theft, etc. and while accounts receivable a current assets, not all firms collect the full balance of what they are owed, let alone collecting it when it is due. Cash is king in the world of finance because it is cash and cash alone that is used to meet financial commitments.



A firm wants to decrease its debt-to-asset ratio without affecting its current ratio. Which of the following actions can it undertake?

  1. Retire some of its outstanding bonds by using proceeds from the sale of old assets.
    II. Increase sales on credit.
    III. Pay off a part of the "salaries payable" account using cash.
    IV. Issue new stocks and invest the proceeds to purchase a production plant.
  2. I, II & III
  3. I & IV
  4. IV only
  5. II & III

Answer(s): C

Explanation:

Both "accounts receivable," which represents sales on credit and "salaries payable" are current accounts.
Therefore, if you do not want to affect current ratio, II and III are not acceptable strategies. When old assets are sold and the proceeds used to retire outstanding bonds, the debt-to-asset ratio decreases. This is because debt/asset ratio is almost always less than 1 (we will ignore abnormal cases where book equity can go negative; e.g. the case where the firm keeps borrowing and paying out the proceeds as dividends). Hence, when both numerator and denominator are decreased, the ratio decreases. However, the current portion of the long-term debt also gets retired, increasing the current ratio. So I is also not an acceptable strategy, though at first glance it appears so. With IV, debt is unaffected but assets increase, decreasing the debt/asset ratio.



When the Percentage of Sales method is used, the estimated bad debt expense is calculated by

  1. dividing total sales on account by the percentage
  2. subtracting the percentage of net sales on account from the balance of allowance for uncollectible accounts
  3. multiplying total sales on account times the percentage
  4. multiplying net sales on account times the percentage

Answer(s): D

Explanation:

This method bases the period adjustment on a percent of net sales on account for the period.



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