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Free Test Prep CFA-Level-I Exam Questions (page: 90)

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The cash flow statement provides more objective information about all of the following, except

  1. trends in cash flow components.
  2. management decisions regarding financial policy, dividend policy, and investment for growth.
  3. a firm's ability to generate cash flows from operations.
  4. cash consequences of investing and financing decisions.
  5. the amount a firm can be leveraged.

Answer(s): E

Explanation:

In this case balance sheet data must be used to determine the answer.



Which of the following would not be included as a liability on a corporate balance sheet?

  1. Accrued liabilities
  2. Current portion of long-term debt
  3. Accounts payable
  4. Marketable securities
  5. Notes payable

Answer(s): D

Explanation:

Marketable securities are not a liability; it represents the value of a company's investment in stocks bonds and money market instruments.



The Income Statement:

  1. reflects the current operating performance of the firm.
    II. indicates whether the firm is healthy and growing or not.
    III. explains the changes in assets, liabilities and Equity of the firm.
    IV. is a snapshot of a firm's operations at a given time.
  2. I, II, III & IV
  3. II & III
  4. I only
  5. I & IV

Answer(s): C

Explanation:

II needs a cash flow statement, in addition. III is not true since the Income statement does not contain all the details which pertain to changes in assets and liabilities. Finally, an income statement shows the performance over a time period and is hence, not a "snapshot" of operations.



Which of the following is not a common tool used in financial statement analysis?

  1. trend series analysis
  2. random walk analysis
  3. common size statement analysis
  4. ratio analysis

Answer(s): B



When prices are rising, which of the following inventory valuation methods produces the lowest income tax liability?

  1. None of these answers
  2. LIFO
  3. Average cost
  4. FIFO

Answer(s): B

Explanation:

When prices are rising, LIFO will produce the lowest profit, and the lowest income tax liability, because the last in (highest cost) inventory is the first out. This leaves the oldest inventory on hand and since it has the lowest cost, ending inventory will have the lowest value which means that cost of goods sold will be the highest and profits will be the lowest (ending inventory = beginning inventory + net purchases - cost of goods sold).



What is the primary function of the Securities and Exchange Commission as it relates to a company's financial statements?

  1. None of these answers.
  2. To function as the standard-setting body of the accounting profession.
  3. To provide the investment public with completely independent and unbiased advice regarding the purchase of good quality public securities.
  4. To ensure that a public company makes full and accurate disclosure of all pertinent information relating to a company's business.

Answer(s): D

Explanation:

To ensure that a public company makes full and accurate disclosure in the company's registration statement of all pertinent information relating to a company's business, its securities, its financial position and earnings, and the underwriting arrangements.



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

  1. With stock splits and stock dividends, previously reported EPS numbers are retroactively readjusted.
    II. Shares issued for the acquisition of another business are included from the date of issuance.
    III. Shares issued in pooling of interests are assumed to have been outstanding at the beginning of all the periods reported.
  2. II & III
  3. I, II & III
  4. I & III
  5. I only

Answer(s): B

Explanation:

In the computation of basic EPS, one must be careful about the time period for which shares are assumed to be outstanding. This becomes an issue when the firm issues new shares or reacquires outstanding shares during the accounting period. Further, the purpose for which the shares are issued are also of concern since the computation of the weighted number of shares outstanding must be consistent with the logic behind the accounting treatment of the newly issued shares. Hence, when shares are issued for the acquisition of another business, they are considered as equity issued to raise new capital for investment and therefore included from the date of issuance. On the other hand, under pooling of interests method, the merged companies are assumed to have been a combined entity since their respective inceptions. Therefore, when shares are issued under pooling of interests, they are assumed to have been outstanding at the beginning of all the periods reported. Finally, stock splits and stock dividends change the number of shares without any direct impact on earnings. Hence, for consistency, previously reported EPS numbers are retroactively readjusted.



A company is currently being sued by a customer. A reasonable estimate can be made of the costs that would result from a ruling unfavorable to the company, and the amount involved is material. The company's managers, lawyers, and auditors agree that there is a remote likelihood of an unfavorable ruling. This contingency

  1. none of these answers.
  2. should be disclosed as a parenthetical comment in the balance sheet.
  3. should be disclosed as an appropriation of retained earnings.
  4. should be disclosed in a footnote.
  5. need not be disclosed in a footnote.

Answer(s): E

Explanation:

Losses arising from litigation should be accrued if both probable and reasonably estimable, and should be disclosed if reasonably possible. In this case, the likelihood is remote. Therefore, no disclosure is required.



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