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Free Test Prep CFA-Level-I Exam Questions (page: 81)

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Which of the following is/are true about held-to-maturity securities?

  1. They are mostly non-current assets.
    II. They are reported at fair market value.
    III. Income on these securities is included in operating income.
  2. II only
  3. II & III
  4. I & III
  5. I, II & III

Answer(s): C

Explanation:

Marketable securities classified as "Held-to-maturity" are financial securities purchased with the intent (and ability) to hold until maturity. They are therefore categorized as non-current assets in all periods except the one in which they are about to mature. They are reported on the balance sheet at theamortized historical cost and income on the securities, including amortization of premium or discount, is part of the operating income.



Which of the following would be classified a cash inflow from investing activities?

  1. Proceeds from collecting the principal amount of loans.
  2. Proceeds from selling investments in the equity securities of other companies.
  3. All of these answers are correct.
  4. Proceeds from selling investments in the debt securities of other entities, except cash equivalents.

Answer(s): C

Explanation:

All responses qualify as cash inflows from investing activities.



Under an inflationary, LIFO environment with stable inventories, which of the following is true compared to FIFO?

Working Capital Taxes Current Ratio

  1. Higher Lower Lower
    II. Lower Lower Lower
    III. Higher Lower Lower
    IV. Lower Higher Higher
  2. II
  3. I
  4. IV
  5. III

Answer(s): A

Explanation:

With rising prices and stable inventories, the COGS is higher under LIFO than under FIFO, thus lower net income and lower taxes. Ending inventory is valued lower under LIFO than under FIFO and hence, a lower current asset value and lower working capital and current ratio.



Long-term obligations that are or will become callable by the creditor because of the debtor's violation of a provision of the debt agreement at the balance sheet date should be classified as

  1. current liabilities unless the creditor has waived the right to demand repayment for more than 1 year from the balance sheet date.
  2. current liabilities unless it is reasonably possible that the violation will be corrected within the grace period.
  3. contingent liabilities until the violation is corrected.
  4. none of these answers.
  5. long-term liabilities

Answer(s): A

Explanation:

Current liabilities include obligations that must be liquidated within 1 year as well as obligations that are or will be callable by the creditor within 1 year because of a violation of a debt covenant. An exception exists, however, if the creditor has waived or subsequently lost the right to demand repayment for more than 1 year from the balance sheet date.



Why do the corporation's directors declare stock dividends?

  1. to increase the market value of the company's stock
  2. to provide tangible evidence of management's confidence in the company's strong performance
  3. to decrease the number of shares outstanding
  4. none of these answers is correct

Answer(s): B

Explanation:

Declaring a stock dividend will increase the number of shares outstanding and thereby keep the per share price low enough to be an attractive investment. Stock dividends may also show the company management's confidence in the present and future performance of the company.



Which of the following is the proper method of reporting the value of financial instruments on a firm's balance sheet?

  1. All of these answers
  2. Higher of cost or market
  3. None of these answers
  4. Cost
  5. Fair market value

Answer(s): D

Explanation:

Company's are required by accounting regulations to record and report the value of financial instruments such as derivatives at cost.



A financial auditor's report is required to:

  1. make sure that no fraudulent activity is occurring with the accounting systems.
    II. provide reasonable assurance that there are no material errors in the statements.
    III. attest to the fact that the auditor has performed adequate testing on the company's accounting system to ensure that the financial reporting is accurate.
    IV. state an opinion about the controls and checks present in the firm's reporting procedures.
  2. I & IV
  3. I, III & IV
  4. I, II & III
  5. II & III

Answer(s): D

Explanation:

IV is usually reported to management but not in the audit report. Also, a financial auditor, would, in the course of her audit, check for material misstatements but is not responsible for unearthing fraudulent activities.



Accounting Standards are best described as

  1. the state-of-the-art presentation of the science of accounting.
  2. presentation standards mandated by the Securities and Exchange Commission.
  3. the result of a political process among groups with diverse interests.
  4. measuring the quality of stewardship.

Answer(s): C

Explanation:

Accounting standards have been through a long development process and are subject to continual innovation, modification, and change. Currently, the Financial Accounting Standards Board (FASB), composed of seven full-time paid members, functions as the standard-setting body of the accounting profession.



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