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Free Test Prep CFA-Level-I Exam Questions (page: 86)

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Which of the following is/are true?

  1. Straight preferred equity holders to do not have a right to demand redemption.
    II. Dividend payments on preferred equity are cumulative.
    III. Dividends on common stock cannot be paid unless preferred dividends are paid.
    IV. Preferred dividends which are in arrears are a non-recorded liability.
  2. I & IV
  3. I, II, III & IV
  4. I, II & III
  5. II, III & IV

Answer(s): B

Explanation:

Preferred equity is usually not redeemable, implying that preferred equity holders do not have a right to demand from the company a retirement of their equity through redemption payment. Preferred dividends that are not paid when due remain a liability, though they are not recorded as such. This leads to an understatement of liabilities since someday, these dividends must definitely be paid. In particular, the dividends in arrears are cumulative and must be paid in full before any ordinary dividends can be paid to common stockholders.



The accumulated amount by which a plant asset has been depreciated over its useful life is classified as

  1. a liability
  2. an asset
  3. an expense
  4. revenue

Answer(s): B

Explanation:

Accumulated Depreciation reports the total amount of depreciation expense recognized in all prior periods since the asset(s) were put into service.



Under accrual accounting, which of the following is/are Incorrect?

  1. Revenues are recognized when cash is received.
    II. The reported income is a good indicator of the firm's current performance.
    III. Expenses do not always involve cash flows.
    IV. Revenues and the related costs are matched in the same period.
  2. I only
  3. II & III
  4. III only
  5. All of these answers are correct

Answer(s): A

Explanation:

Under accrual accounting, revenues are recognized when the earnings process behind the revenues is complete and expenses are recognized in the period the goods and services are used for generating income.
Therefore, revenues and expenses do not always involve actual cash flows, though revenues and costs that are related do get matched in the same period whenever such an identification is possible.



The Income Summary account is

  1. a permanent account
  2. an asset
  3. a temporary account
  4. a liability

Answer(s): C

Explanation:

The Income Summary account is a temporary account created especially for the closing process and is used only for flowing adjustments and closing entries through.



Use the following financial data on Enterprise:

  1. Sale of equipment $32,000
  2. Loss on equipment sale $9,000
  3. Dividends paid $12,500
  4. Purchase of an office suite $104,000
  5. Common stock repurchase $45,000
  6. Dividends received from investments $8,500
  7. Interest received on Treasury bonds $1,200
  8. Supplier accounts paid $3,700
  9. Cash collection from customers $14,200
  10. Ending cash balance $98,000
    $198,300
    In the above question, the beginning cash balance of the firm was ________.:
  11. $216,300
  12. .$207,300
  13. C$198,300
    N. $109,300

Answer(s): B

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, beginning balance = 98,000 - (32,000 -12,500 -104,000 - 45,000 + 8,500 +1,200 - 3,700 + 14,200) = $207,300.



Which of the following conditions would allow a firm to classify a short-term liability as a long-term debt?

  1. The firm has issued a long-term note with the stated purpose of extinguishing the short-term debt when it matures. The note is cancelable if there are violations of certain operating provisions.
    II. The firm has entered into a binding agreement with a bank to refinance the short-term debt with a long-term liability.
    III. The firm has announced that it will continue to refinance the debt with available credit for the next 2 years.
  2. III only
  3. I & III
  4. II only
  5. II & III

Answer(s): C

Explanation:

If these agreements have any provisions for cancellation which are either ambiguous or which have a good probability of being violated, then the short-term debt cannot be classified as a long-term debt. That's why (I) is not a valid choice. (III) is not acceptable since there is no demonstration of credible intent or ability to be able to refinance the debt.



An analyst with Guffman Investments has developed a stock selection model based on earnings announcements made by high P/E stocks. The model predicts that investing in companies with P/E ratios twice that of their industry average that make positive earnings announcements will generate significant excess return. If the analyst has consistently made superior risk-adjusted returns using this strategy, which form of the efficient market hypothesis has been violated?

  1. Weak form of market efficiency.
  2. Semistrong and weak forms of market efficiency.
  3. Strong, semistrong, and weak forms of market efficiency.

Answer(s): B

Explanation:



Extraordinary items are placed on the income statement:

  1. after net income from continuing operations and net of tax.
  2. as a footnote to the statement as they are 1 time items and are not a part of the normal course of business for a corporation.
  3. within income from operations net of tax.
  4. after net income from continuing operations and before taxes.

Answer(s): A

Explanation:

Extraordinary items are always included net of tax after the net income from continuing operations. These items are unusual items for the company and occur infrequently.



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