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Free Test Prep CFA-Level-I Exam Questions (page: 92)

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How should the effect of a change in accounting estimate be accounted for?

  1. None of these answers.
  2. By reporting pro forma amounts for prior periods.
  3. In the period of change and future periods if the change affects both.
  4. By restating amounts reported in financial statements of prior periods.
  5. As prior-period adjustments to beginning retained earnings.

Answer(s): C

Explanation:

The effect of a change in accounting estimate must be accounted for as a component of income from continuing operations in the period of change and in future periods.



In a period of falling prices, the FIFO inventory method

  1. neither of these answers is correct
  2. both of these answers are correct
  3. magnifies the effects of the business cycle on income
  4. gives the lowest possible value for ending inventory

Answer(s): B

Explanation:

The first-in-first-out (FIFO) method is based on the assumption that the costs of the first items acquired should be assigned to the first items sold, therefore ending inventory on hand is based on the most recent prices.



Realized gains and losses from sales of assets are measured as

  1. fair value of asset less net book value of asset.
  2. sales price of asset less net book value of asset.
  3. net book value less fair value of asset.
  4. sales price of asset less fair value of asset.

Answer(s): B



A firm has total assets of 5,320, net sales of 8,395, average receivables of 894, current assets of 2,393 and a current ratio of 1.2. Its average receivables collection period equals ________.

  1. 41.73 days
  2. 29.92 days
  3. 23.19 days
  4. 38.87 days
  5. Receivables turnover ratio = Net annual sales/average receivables

Answer(s): D

Explanation:

This is measured by two ratios in slightly different ways:
E. Receivables turnover ratio = Net annual sales/average receivables
F. Average receivables collection period = 365/receivables turnover In this case, receivables turnover = 8,395/894 = 9.39. Therefore, average receivables collection period = 365/9.39 = 38.87 days. Notice that the collection period is measured in "days."



Calculating COGS under a periodic inventory system relies on which of the following?

  1. a physical count of the ending inventory
  2. an analysis of the inventory value of each sale
  3. both of these answers are correct
  4. neither of these answers is correct

Answer(s): A

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.



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

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

Answer(s): B

Explanation:

When prices are rising, FIFO will produce the highest ending inventory value because the first in (lowest cost) inventory is the first out. This leaves the most recently purchased inventory on hand and since it was purchased at higher prices, it has the highest cost and ending inventory will have the greatest value.



Which of the following is/ are true?

  1. Assets = Equity + Liabilities
    II. Equity = Retained earnings + Dividends Payable
    III. Assets + Liabilities = Equity
    IV. Assets = Liabilities - Equity
  2. II & IV
  3. I only
  4. I & II
  5. III only

Answer(s): B

Explanation:

The basic accounting equation states that Assets = Liabilities + Owners' Equity.



Which of the following would have an effect on cash flow from operations?

  1. Sale of machinery for $50,000 with a net book value of $35,000.
    II. Purchase of supplies on credit.
    III. Remittance by customer in payment of goods purchased last accounting period.
    IV. Lease payment on machinery, which is accounted for as a capital lease.
  2. I, II and III
  3. I, III and IV
  4. III and IV
  5. I and III

Answer(s): C



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