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Free Test Prep CFA-Level-I Exam Questions (page: 87)

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Minority interest on the consolidated balance sheet is listed ________.

  1. none of these answers
  2. as a liability
  3. between liabilities and shareholders' equity
  4. as a component of shareholders' equity
  5. as an asset

Answer(s): C

Explanation:

Minority interest represents the proportionate stake of minority shareholders in a company's majority- owned subsidiary that is consolidated. Minority interest is neither a liability nor equity but it is a financing component and, therefore, is presented between liabilities and shareholders' equity.



What impact will the amortization of an intangible asset over a longer than appropriate period have on a firm?

  1. It will result in higher than otherwise sales revenues.
  2. None of these answers.
  3. All of these answers.
  4. It will reduce a firm's current income tax liability.
  5. It will improve reported earnings.

Answer(s): E

Explanation:

Earnings, not revenues will be improved because amortizing an intangible asset over a longer than appropriate period reduces the annual amortization expense; this improves pre-tax and after-tax profits.



The interest expense on a premium bond _______ over time.

  1. decreases
  2. remains constant
  3. can increase or decrease, depending on interest rate movements
  4. increases

Answer(s): A

Explanation:

Remember that the book value of the liability of any straight bond equals the face value at maturity. Hence, when the bond is issued at a premium, the premium amount is amortized over the life of the bond. The outstanding liability thus decreases steadily toward the face value. The decreasing liability decreases the interest expense over time.



According to the FASB conceptual framework, which of the following situations violates the concept of reliability?

  1. Financial statements include property with a carrying amount increased to management's estimate of market value.
  2. None of these answers.
  3. Financial statements are issued 9 months late.
  4. Data on segments having the same expected risks and growth rates are reported to analysts estimating future profits.
  5. Management reports to stockholders regularly refer to new projects undertaken, but that financial statements never report project results.

Answer(s): A

Explanation:

Reliability has 3 primary qualities: verifiability, neutrality and representational faithfulness. Neutrality is violated here as information should not be prepared or reported to obtain a predetermined result, and should be free from bias.



The accumulated depreciation account should show

  1. total depreciation for fixed assets since the business was formed
  2. current depreciation expense plus estimated depreciation for next year
  3. total depreciation for fixed assets still in use
  4. only the depreciation expense recognized during the current year

Answer(s): C

Explanation:

Depreciation recognized and accumulated on fixed assets still on the books is reflected in the Accumulated Depreciation account(s).



Costs that can be reasonably associated with specific revenues but not with specific products should be

  1. capitalized and then amortized over a period not to exceed 60 months.
  2. expensed in the period in which the related revenue is recognized.
  3. capitalized and then amortized over a period not to exceed 40 years.
  4. allocated to specific products based on the best estimate of the production processing time.
  5. charged to expense in the period incurred.

Answer(s): B

Explanation:

The expense recognition principle of "associating cause and effect" or "matching" applies when a direct cause and effect relationship can be demonstrated between costs and particular revenues.



Which of the following relationships is true?

  1. Gross profit margin < Net profit margin < Operating profit margin
  2. Gross profit margin < Operating profit margin < Net profit margin
  3. Gross profit margin > Operating profit margin > Net profit margin
  4. Net profit margin > Gross profit margin > Operating profit margin

Answer(s): C

Explanation:

Gross profit = Net sales - COGS
Operating profit = Gross Profit - Sales & General Expenses = EBDIT Net Income = Earnings after depreciation, interest expense and taxes = Operating profit - depreciation - interest expense - taxes
Since gross profit > operating profit > net income, "Gross profit margin > Operating profit margin > Net profit margin" is the correct choice.



A firm's financial data show:

Taxable income 1,500
Taxes paid 500
Non-cash operating expenses 780
Bonds retired 700
Loss on retired bonds 140

Then, the financing cash flow equals ________.

  1. -700
  2. -840
  3. 160
  4. -900

Answer(s): D

Explanation:

The firm's tax rate equals 500/1,500 = 30%. Note that loss on bonds retired is an extraordinary item under US GAAP and presented after-tax. Hence, the total cash spent on retiring bonds = 700 + 140/(1-0.3) = 900. So financing cash flow = -900.



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