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CFA-Level-I: CFA® Level I Chartered Financial Analyst
Free Practice Exam Questions (page: 89)
Updated On: 2-Jan-2026

Page 89 of 496
PDF with 3963 Questions

In the direct method statement of cash flows, the primary component of investing cash flow is typically

  1. dividend payments.
  2. long-term investments in securities.
  3. capital expenditures for long-term assets.
  4. repayment of debt.
  5. investments in affiliates.

Answer(s): C

Explanation:

Capital expenditures for long-term assets such as plant and machinery are usually the primary component of investing cash flow.



Items reported as prior-period adjustments

  1. do not include the effect of a mistake in the application of accounting principles as this is accounted for as a change in accounting principle rather than a prior-period adjustment.
  2. do not affect the presentation of prior-period comparative financial statements.
  3. are reflected as adjustments of the opening balance of the retained earnings of the earliest period presented.
  4. none of these answers.
  5. do not require further disclosure in the body of financial statements.

Answer(s): C

Explanation:

Prior-period adjustments are made for the correction of errors. All the effects of errors on prior-period financial statements are reported as adjustments to beginning retained earnings for the earliest period presented in the retained earnings statement.



Which of the following is/are true about computation of Basic EPS?

  1. Reacquired shares are excluded from the date of acquisition.
    II. Shares issued in the purchase of assets are assumed to have been outstanding for the entire period.
    III. Shares issued in mergers are assumed to have been outstanding from the date of issuance.
  2. I only
  3. II & III
  4. I & II
  5. I, II & III

Answer(s): A

Explanation:

Weighted average shares used in EPS computations are calculated using the following rules:
1. Reacquired shares are excluded from the date of acquisition.
2. Shares issued in the purchase of assets are included from the date of issuance.
3. Shares issued in mergers are assumed to have been outstanding for all periods for which EPS numbers are presented.



At December 31, 1996, Davis Inc. awaits judgment on a lawsuit for a competitor's infringement of Davis' patent. Legal counsel believes it is probable that Davis will win the suit and indicated the most likely award together with a range of possible awards. How should the lawsuit be reported in Davis' 1996 financial statements?

  1. None of these answers.
  2. Neither in note disclosure nor by accrual.
  3. In note disclosure only.
  4. By accrual for the lowest amount of the range of possible awards.
  5. By accrual for the most likely award.

Answer(s): C

Explanation:

A loss contingency is recognized but not a gain contingency following the principle of conservatism. A gain contingency is only disclosed in the notes until the settlement is realized.



A firm is purchased for more than the fair market value of its assets. The excess is:

  1. considered a "premium paid" and amortized over the life of the acquired assets.
  2. considered as "Goodwill."
  3. written off against the retained earnings on the balance sheet.
  4. treated as an extraordinary loss & presented net of taxes on the income statement.

Answer(s): B

Explanation:

Goodwill is defined as the price paid in excess of the fair market value of the assets of the target firm.



When analyzing the balance sheet, which of the following is an argument against using LIFO in times of rising prices?

  1. Neither of these answers is correct.
  2. Both of these answers are correct.
  3. Under LIFO, ending inventory will be overstated.
  4. Under LIFO, ending inventory is valued at the oldest prices, an unrealistic valuation.

Answer(s): D

Explanation:

LIFO values ending inventory at the oldest prices, thus in times of rising prices, inventory will be understated.
This results in reporting an unrealistic valuation of the company's inventory.



Cash outflows for payment of cash dividends is an example of:

  1. cash flows from financing activities
  2. cash flows from investing activities
  3. cash flows from noncash investing and financing activities
  4. cash flows from operating activities

Answer(s): A

Explanation:

Providing stockholders with a return on their investment in the form of a cash dividend is a financing activity.



Why do the corporation's directors declare stock dividends?

  1. to increase the number of shares outstanding
  2. all of these answers are correct
  3. to keep the market value of the company's stock affordable
  4. to provide tangible evidence of management's confidence in the company's strong performance

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.



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