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Free Test Prep CFA-Level-I Exam Questions (page: 91)

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When prices are rising, which of the following inventory valuation methods produces a higher profit?

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

Answer(s): B

Explanation:

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



Calculate the book value per share of Quality, Inc.'s common stock, given the following information. Par value of common stock, $2.5 per share; total assets, $19,100,000; retained earnings, $7,375,000; total liabilities, $6,975,000; number of common shares outstanding, 1,250,000; number of preferred sharesoutstanding, 15,000 at $100 par value. Market value of common stock, $24.25. Market value of preferred stock, $106.50.

  1. $8.50
  2. $15.28
  3. $3.80
  4. $9.38
  5. None of these answers

Answer(s): A

Explanation:

The book value of the firm's common stock is $8.50 which is calculated as follows: total assets of $19,100,000, minus total liabilities of $6,975,000, minus, preferred stock outstanding of $1,500,000 (15,000 X $100), divided by the number of common shares outstanding of 1,250,000.



An organization purchased a computer on January 1, 1996 for $108,000. It was estimated to have a 4- year useful life and a salvage value of $18,000. The double-declining-balance method is to be used. The amount of depreciation to be reported for the year ending December 31, 1996 is ________.

  1. ($108,000 - 18,000) (25% X 2)
  2. ($108,000) (25% X 2)
  3. ($108,000 - 18,000) (25% X 1/2)
  4. ($108,000) (25%)
  5. ($108,000) (25% X 1/2)

Answer(s): B

Explanation:

When using a declining-balance method, a constant rate is applied to the changing carrying value of the asset.
The constant rate for the double-declining-balance method is twice the straight-line rate ((100% / 4 years) X 2)



Which of the following is/are true about depreciation?

  1. Depreciation allocates non-cash expenses to period in which long-lived assets are used.
    II. Depreciation provides funds for the replacement of an asset.
    III. Depreciation charges arise due to an adherence to accrual method of accounting.
  2. I only
  3. III only
  4. I & III
  5. I, II & III

Answer(s): C

Explanation:

Depreciation is the accounting device which facilitates a charging of the costs incurred in prior periods on assets that have been used for productive activities in the current period. Note that this is a non- cash expense since the cash left the firm's coffers at the time the asset was purchased (either in part or in full). Remember, however, that depreciation has cash flow consequences indirectly through its effect on taxes. Depreciation expense owes its existence to the accrual method of revenue recognition whichrequires that expenses be matched with the revenues generated. No depreciation charges would exist under Cash accounting, which would allocate expenses as and when cash was used to make payments on asset purchases. Clearly, depreciation does not provide funds for anything for it is an accounting entry.



Which of the following is/are true about trading securities?

  1. They are current assets.
    II. They are reported at fair market value.
    III. Changes in their reported value are allocated directly to retained earnings.
  2. I only
  3. II & III
  4. I, II & III
  5. I & II

Answer(s): D

Explanation:

Marketable securities classified as "Trading securities" are financial securities purchased with the intent to sell in the near future. They are therefore categorized as current assets and reported at the fair market value on the date of the balance sheet. When the classification of a trading security is changed, the assignation of the security to the new account is carried out at the fair market value on the transfer date, with any gain or loss reflected separately on the income statement.



Where is Unearned Revenue reported in the financial statements?

  1. liability section of the balance sheet
  2. revenue section of the income statement
  3. asset section of the balance sheet
  4. operating expense section of the income statement

Answer(s): A

Explanation:

Unearned revenue represents "services owed" and is reported in the liability section of the balance sheet.



Under a periodic inventory system, how is COGS determined?

  1. Ending inventory is counted and subtracted from beginning inventory.
  2. Cost of goods sold is accumulated as sales are made.
  3. None of these answers is correct.
  4. The cost of ending inventory is subtracted from costs of goods available for sale.

Answer(s): D

Explanation:

Under the periodic inventory system, only the ending inventory is counted and priced. Cost of goods sold is determined by deducting the cost of the ending inventory from the cost of goods available for sale.



The portion of the insurance premiums that has expired during the fiscal period is classified as

  1. an increase in retained earnings
  2. an asset
  3. an expense
  4. a liability

Answer(s): C

Explanation:

In accordance with the matching rule, the amount of an insurance policy that has expired during the accounting period must be recorded and classified as an expense for the period.



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