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Free Test Prep CFA-Level-I Exam Questions (page: 79)

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A dividend that distributes more than 25% of the outstanding shares before the dividend is called:

  1. a liquidating dividend
  2. illegal
  3. a large stock dividend
  4. a capitalizing dividend

Answer(s): C

Explanation:

Large stock dividends distribute greater than 25% of outstanding shares before the dividend and small stock dividends distribute less than or equal to 25% of previously outstanding shares.



Which of the following best describes a balance sheet?

  1. None of these answers.
  2. A balance sheet reports changes over a period of time in component accounts that comprise the ownership of a firm.
  3. A balance sheet summarizes the financial position of a company at a given point in time.
  4. A balance sheet details the cash inflows and outflows that are related to a company's operating, investing, and financing activities over a period of time.
  5. A balance sheet measures a company's financial performance over a specified period of time.

Answer(s): C

Explanation:

A balance sheet provides a detailed listing of a company's assets, liabilities, and equity at a point in time. This provides a glimpse at a company's financial condition.



Irwin Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums saved minus recognized losses from lawsuits and other claims. As a result of a 1996 accident, Irwin is a defendant in a lawsuit in which it will probably have to pay damages of $190,000. What are the effects of this lawsuit's probable outcome on Irwin's 1996 financial statements?

  1. An increase in expenses and no effect on liabilities.
  2. No effect on expenses and an increase in liabilities.
  3. An increase in both expenses and liabilities.
  4. None of these answers.
  5. No effect on either expenses nor liabilities.

Answer(s): C

Explanation:

Since the outcome of the lawsuit is probable and estimable, the amount of $190,000 will be recorded in the financial statements as a contingent liability and an expense.



At the end of an accounting period, each expense that has been incurred but not yet paid should be recorded as ________.

  1. a closing entry
  2. an opening entry
  3. an adjusting entry
  4. a reversing entry

Answer(s): C

Explanation:

Expenses should be recognized in the period in which they are incurred. In order to be consistent with the matching principle, an adjusting entry must be made to record the expense, regardless of whether it has been paid.



Deferred taxes would be classified as

  1. a long-term borrowing.
  2. a current liability.
  3. a current asset.
  4. a prepaid expense.
  5. stockholders' equity.

Answer(s): C

Explanation:

Deferred income taxes represent deferred tax assets.



A firm issued 2 million warrants with an exercise price of 102 on June 15, 1996. The maximum price of the stock in 1996 was 129, the average price was 110. The stock closed out the year at 99. How many additional shares must be used in the computation of Diluted EPS as a result of these warrants?

  1. 111,782
  2. 145,454
  3. 78,788
  4. zero

Answer(s): C

Explanation:

The conversion assumptions for options and warrants are as follows:
1. They are assumed to be exercised at the beginning of the period or at the time of issuance, whichever is later.
2. They enter into the Diluted EPS calculations only if the average stock price during the period exceeds the exercise price. With the Treasury stock method, the total shares repurchased using exercise proceeds = 2*102/110 = 1,854,546. Thus, additional shares issued = 2 million - 1,854,546 = 145,454. These are outstanding for 6.5 months. Therefore, additional weighted shares = 145,454*6.5/12 = 78,788.



Which of the following correctly defines an element directly related to measuring the performance and status of a business entity?

  1. Gains are increases in equity from transactions and other events and circumstances that result from revenues or investments by owners.
  2. Equity is a residual interest.
  3. Investments by owners are limited to receipts of assets and satisfaction or conversion of liabilities.
  4. Revenues are inflows from peripheral or incidental transactions as well as the entity's ongoing major operations.
  5. None of these answers.

Answer(s): B

Explanation:

Equity in a business is considered a residual interest and represents the ownership (total assets minus total liabilities) in the firm.



A piece of equipment costs $200,000, has a useful life of 5 years and an estimated salvage value of $50,000. How much depreciation expense should the company recognize in year 4 if it is using the sum-of-the- years' digits method of depreciation?

  1. $30,000
  2. $80,000
  3. $26,666.67
  4. $20,000

Answer(s): D

Explanation:

Using the sum-of-the-years' digits the sum of the years is 15. In year 4 you would take 2/15 of the cost less the salvage value. 2/15 of $150,000 is equal to $20,000.



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