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Free Test Prep CFA-Level-I Exam Questions (page: 94)

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PDF with 3963 Questions

When purchased, plant assets are recorded at:

  1. cost
  2. market value
  3. future value
  4. lower of cost or market

Answer(s): A

Explanation:

Fixed assets are recorded at cost, which includes all normal and reasonable expenditures necessary to get the asset in place and ready to use.



If an independent auditor has not become satisfied by means of other auditing procedures with respect to opening inventories, they should

  1. either disclaim an opinion on the statement of income or qualify the opinion thereon, regardless of the degree of materiality of the amounts involved.
  2. either disclaim an opinion on the statement of income or qualify the opinion thereon, depending on the degree of materiality of the amounts involved.
  3. disclaim an opinion or qualify the opinion on the statements as a whole.
  4. express an adverse opinion on the statements taken as a whole when the amount in question is material.

Answer(s): B

Explanation:

If the auditor has become satisfied as to current inventory, the auditor may use alternative procedures to become satisfied as to opening inventories. But if they cannot become satisfied regarding inventories, a qualified opinion or a disclaimer of opinion may be expressed, depending on materiality. Because cost of goods sold is dependent on opening inventories, an unqualified opinion on the income statement is not possible.



The cumulative effect of changing to a new accounting principle on the amount of retained earnings at the beginning of the period in which the change is made should be included in net income of ________.

  1. the period of change and future periods
  2. the period of change
  3. future periods
  4. none of these answers
  5. neither future periods nor the period of change

Answer(s): B

Explanation:

A change from one acceptable method of accounting to another should be accounted for as the cumulative effect of a change in accounting principle. The cumulative effect should be recognized as a component of net income, net of tax effect, in the period of change.



Which of the following is not a current liability?

  1. Allowance for Uncollectible Accounts
  2. Wages Payable
  3. Unearned Revenue
  4. Notes Payable

Answer(s): A

Explanation:

Allowance for Uncollectible Accounts is a contra account to Accounts Receivable, both of which are reported in the current asset section of the balance sheet.



Mark King, CFA, is valuing Nacho Inc., a food distributor. Nacho is currently selling for $28 per share and has a 3.0% dividend yield. The risk-free rate is 4%, and the expected return on the market is 8%. King has calculated Nacho's beta to be 1.25. Based on King's analysis, Nacho stock's intrinsic value is $30 per share. King should:

  1. invest in Nacho shares.
  2. not invest in Nacho shares because the required rate of return is less than the expected rate of return.
  3. not invest in Nacho shares because the required rate of return is greater than the expected rate of return.

Answer(s): A



An analyst uses a temporary supernormal growth model to value a common stock. The company paid a $2 dividend last year. The analyst expects dividends to grow at 15% each year for the next three years and then to resume a normal rate of 7% per year indefinitely. The analyst estimates that investors require a 12% return on the stock. The value of this common stock is closest to:

  1. $48.
  2. $53.
  3. $71.

Answer(s): B



Douglas Morin is discussing market efficiency with some college students who are visiting his firm. Morin states that market efficiency would increase if the cost of trading decreases, if the cost of information decreases, and if arbitrageurs had less capital. Morin is least likely to be correct in his opinion about:

  1. the cost of trading
  2. the cost of information
  3. arbitrageurs

Answer(s): C



You have a 3-year investment horizon. You can buy a 10% semi annual coupon, 10 year bond for $1,000. You estimate you can reinvest the coupons at 12% and sell the bond in 3 years time for $1,050. Based on this information, what is your horizon return?

  1. 9.5%
  2. 10.0%
  3. 11.5%
  4. 13.5%

Answer(s): C

Explanation:

1.Find the FV of the coupons and interest on interest:
n = 3(2)=6; i = 12/2 = 6; PMT = 50; compute FV =348.77
2. Determine the value of the bond at the end of 3 years: given = 1,050.00 1,398.77
3. Equate FV (1398.77) with PV (1000) over 3 years (n=6); compute i = 5.75(2) = 11.5%



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