Mock Training #1 (Questions)

CFA 1 – MOCK TRAINING #1
QUESTIONS
FINANCIAL STATEMENT ANALYSIS

Questions 1 – 16
Reading 16 – Introduction to Financial Statement Analysis

Reading 17 – Financial Reporting Standards
Reading 18 – Understanding Income Statements
Reading 19 – Understanding Balance Sheets
QUANTITATIVE METHODS
Questions 17 – 31
Reading 01 – The Time Value of Money

Reading 02 – Organizing, Visualizing, and Describing Data
Reading 03 – Probability Concepts
CORPORATE ISSUERS
Questions 32 – 45
Reading 28 – Corporate Structures and Ownership

Reading 29 – Introduction to Corporate Governance & Other ESG Considerations
Reading 30 – Business Models
Reading 31 – Capital Investments
Reading 32 – Working Capital
Reading 33 – Cost of Capital : Foundational Topics
Reading 34 – Capital Structure
Reading 35 – Measures of Leverage
Duration : 1h10
CFA 1 – Mock Training #1 Friday 23rd September 2022
Financial Statement Analysis
1. The financial statement that presents a shareholder ’s residual claim on

assets is the:
A) balance sheet.
B) income statement.
C) cash flow statement.
1 /45 Neoma Business School – Flavien Bourras, CFA

2. The income statement is best used to evaluate a company’s:
A) financial position.
B) sources of cash flow.
C) financial results from business activities.

3. HVG, LLC paid $12,000 of cash to a real estate company upon signing a
lease on 31 December 2005.
The payment represents a $4,000 security deposit and $4,000 of rent for each
of January 2006 and February 2006.
Assuming that the correct accounting is to reflect both January and February
rent as prepaid, the most likely effect on HVG’s accounting equation in
December 2005 is:
A) no net change in assets.

B) a decrease in assets of $8,000.
C) a decrease in assets of $12,000.

4. TRR Enterprises sold products to customers on 30 June 2006 for a total price
of €10,000.
The terms of the sale are that payment is due in 30 days.

The cost of the products was €8,000.
The most likely net change in TRR’s total assets on 30 June 2006 related to
this transaction is:
A) €0.
B) €2,000.
C) €10,000.

5. Squires & Johnson, Ltd., recorded €250,000 of depreciation expense in

December 2005. The most likely effect on the company’s accounting
equation is:
A) no effect on assets.
B) a decrease in assets of €250,000.
C) an increase in liabilities of €250,000.

6. Which of the following statements about cash received prior to the

recognition of revenue in the financial statements is most accurate?
The cash is recorded as:
A) deferred revenue, an asset.

B) accrued revenue, a liability.
C) deferred revenue, a liability.

7. When, at the end of an accounting period, a revenue has been recognized in

the financial statements but no billing has occurred and no cash has been
received, the accrual is to :
A) unbilled (accrued) revenue, an asset.

B) deferred revenue, an asset.
C) unbilled (accrued) revenue, a liability.

8. Which of the following best describes the role of financial statement

analysis?
A) To provide information about a company’s performance

B) To provide information about a company’s changes in financial position
C) To form expectations about a company’s future performance and financial
position

9. Information about management and director compensation are least likely to

be found in the:
A) auditor’s report.
B) proxy statement.
C) notes to the financial statements.

10. Which of the following best describes why the notes that accompany the
financial statements are required?
The notes:
A) permit flexibility in statement preparation.

B) standardize financial reporting across companies.
C) provide information necessary to understand the financial statements.

11. An auditor determines that a company’s financial statements are prepared in

accordance with applicable accounting standards except with respect to
inventory reporting.
This exception is most likely to result in an audit opinion that is:
A) adverse.
B) qualified.
C) unqualified.

12. Interim financial reports released by a company are most likely to be:
A) monthly.
B) unaudited.
C) unqualified.

13. Which of the following is not a required financial statement according to IAS
No. 1?
A) Statement of financial position.

B) Statement of changes in income.
C) Statement of comprehensive income.

14. The information provided by a balance sheet item is limited because of

uncertainty regarding:
A) measurement of its cost or value with reliability.

B) the change in current value following the end of the reporting period.
C) the probability that any future economic benefit will flow to or from the
entity.

15. Accrued expenses (accrued liabilities) are:
A) expenses that have been paid.

B) created when another liability is reduced.
C) expenses that have been reported on the income statement but not yet
paid.

16. Which of the following would an analyst most likely be able to determine from
a common-size analysis of a company’s balance sheet over several
periods?
A) An increase or decrease in sales.

B) An increase or decrease in financial leverage.
C) A more efficient or less efficient use of assets.

Quantitative Methods
17. Joe Mayer, CFA, projects that XYZ Company's return on equity varies with the
state of the economy in the following way:
The standard deviation of XYZ's expected return on equity is closest to:
A) 1.5%.
B) 12.3%
C) 3.5%

18. Twenty Level I CFA candidates in a study group took a practice exam and
want to determine the distribution of their scores.
When they grade their exams they discover that one of them skipped an ethics
question and subsequently filled in the rest of his answers in the wrong places,
leaving him with a much lower score than the rest of the group.
If they include this candidate's score, their distribution will most likely:
A) have a mode that is less than its median.

B) be positively skewed.
C) have a mean that is less than its median.

19. For the investments shown in the table below:
Which of the following statements is most accurate?
A) The median is equal to the mode.

B) The mean is equal to the mode.
C) The mean is equal to the median.

20. A firm wants to select a team of five from a group of ten employees.
How many ways can the firm compose the team of five?
A) 252
B) 120
C) 25

21. An investor has two stocks, Stock R and Stock S in her portfolio.
Given the following information on the two stocks,
• σ R= 34%
• σ S= 16%
• r R,S= 0.67
• W R= 80%
• W S= 20%
the portfolio's standard deviation is closest to:
A) 29.4%
B) 8.7%
C) 7.8%

22. An investor has a $12,000 portfolio consisting of $7,000 in stock A with an

expected return of 20% and $5,000 in stock B with an expected return of 10%.
What is the investor's expected return on the portfolio?
A) 12.2%
B) 15.0%
C) 15.8%

23. The covariance:
A) can be positive or negative.

B) must be between -1 and +1.
C) must be positive.

24. Which of the following rules is used to state an unconditional expected

value in terms of conditional expected values?
A) Total probability rule.

B) Addition rule.
C) Multiplication rule.

25.
What are the arithmetic mean return and the geometric mean return,
respectively, for ABC Mutual Fund for the period Year 1 to Year 10?
A) 7.2% ; 5.6%
B) 8.2% ; 6.8%
C) 7.2% ; 6.8%

26. To compare the returns over the past three years on a mutual fund to the
returns on a certificate of deposit with annual compounding over the same
period, an analyst is least likely to use the mutual fund's annual:
A) time-weighted return.
B) arithmetic mean return.
C) geometric mean return.

27. Other things equal, as the number of compounding periods increases, what
is the effect on the effective annual rate (EAR)?
A) EAR decreases.
B) EAR increases.
C) EAR remains the same.

28. Jamie Morgan needs to accumulate $2,000 in 18 months.
If she can earn 6% at the bank, compounded quarterly, how much must she
deposit today?
A) $1,829.08.
B) $1,832.61.
C) $1,840.45.

29. Monthly returns for a set of small cap stocks are 1.3%, 0.8%, 0.5%, 3.4%, -
3.5%, -1.2%,1.8%, 2.1%, and 1.5%.
An analyst constructs a frequency distribution and a frequency polygon

using the following intervals: -4.0% to -2.0%, -2.0% to 0.0%, 0.0% to 2.0%,
and 2.0% to 4.0%.
Which of the following statements about these data presentations is least

accurate?
A. The absolute frequency of the interval 0.0% to 2.0% is 5.

B. The relative frequency of the interval -2.0% to 0.0% equals the relative
frequency of the interval 2.0% to 4.0%.
C. A frequency polygon plots the midpoint of each interval on the horizontal
axis and the absolute frequency of that interval on the vertical axis.

30. Wei Zhang has funds on deposit with Iron Range bank.
The funds are currently earning 6% interest. If he withdraws $15,000 to

purchase an automobile, the 6% interest rate can be best thought of as a(n):
A) financing cost.
B) discount rate.
C) opportunity cost.

31. A consumer purchases an automobile using a loan.
The amount borrowed is €30,000 and the terms of the loan call for the loan to
be repaid over five years using equal monthly payments with an annual
nominal interest rate of 8% and monthly compounding.
The monthly payment is closest to:
A) €608.29.
B) €626.14.
C) €700.00.

Corporate Issuers
32. The following information is available for a firm:
Revenue £ 800,000
Variable cost 400,000
Fixed cost 200,000
Operating income 200,000
Interest 60,000
Net income 140,000
The firm’s degree of total leverage (DTL) is closest to:
A) 1.43.
B) 2.00.
C) 2.86

33. The following information is available for a firm :
Income Statement Millions ($)
The degree of operating leverage (DOL) is closest to:
A) 2.4.
B) 1.1.
C) 1.7.

34. Financial risk is least likely affected by:
A) debentures.
B) dividends.
C) long-term leases.

35. Business risk most likely incorporates operating risk and:
A) financial risk.
B) sales risk.
C) interest rate risk.

36. The unit contribution margin for a product is $20.

A firm’s fixed costs of production up to 300,000 units is $500,000.
The degree of operating leverage (DOL) is most likely the lowest at which of
the following production levels (in units):
A) 300,000.
B) 200,000.
C) 100,000.

37. If the degree of financial leverage (DFL) is 1.00, the operating breakeven point
compared with the breakeven point is most likely:
A) lower.
B) the same.
C) higher.

38. The per unit contribution margin for a product is $12.
Assuming fixed costs of $12,000, interest costs of $3,000, and taxes of

$2,000, the operating breakeven point (in units) is closest to:
A) 1,417.
B) 1,000.
C) 1,250.

39. A company has decided to switch to using accelerated depreciation from

straight-line depreciation. Holding other factors constant, the degree of total
leverage (DTL) will most likely:
A) increase.
B) not change.
C) decrease.

40. The following information is available for a firm:
Market risk premium 7.0%

Risk-free rate 2.0%
Comparable firm return 10.4%
Comparable firm debt-to-equity ratio 1.0
Comparable firm tax rate 40.0%
The firm’s unleveraged beta is closest to:
A) 0.75.
B) 1.20.
C) 1.05.

41. A company has an equity beta of 1.4 and is 60% funded with debt.
Assuming a tax rate of 35%, the company’s asset beta is closest to:
A) 0.98.
B) 1.01.
C) 0.71.

42. Which method of calculating the firm’s cost of equity is most likely to
incorporate the long-run return relationship between the firm’s stock and the
market portfolio?
A) Capital asset pricing model

B) Dividend discount model
C) Bond yield plus risk premium approach

43. A firm with a marginal tax rate of 40% has a weighted average cost of capital
of 7.11%. The before-tax cost of debt is 6%, and the cost of equity is 9%.
The weight of equity in the firm’s capital structure is closest to:
A) 79%.
B) 65%.
C) 37%.

44. A company recently issued a 10-year, 6% semi-annual coupon bond for $864.
The bond has a maturity value of $1,000.
If the marginal tax rate is 35%, the after-tax cost of debt (%) is closest to:
A) 3.9%.
B) 5.2%.
C) 2.6%

45. A 20-year $1,000 fixed-rate non-callable bond with 8% annual coupons

currently sells for $1,105.94.
Assuming a 30% marginal tax rate and an additional risk premium for equity
relative to debt of 5%, the cost of equity using the bond-yield-plus-risk-
premium approach is closest to:
A) 9.9%
B) 12.0%
C) 13.0%

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CFA 1 – MOCK TRAINING #1

FINANCIAL STATEMENT ANALYSIS

Reading 16 – Introduction to Financial Statement Analysis

Reading 01 – The Time Value of Money

Reading 28 – Corporate Structures and Ownership

Financial Statement Analysis

1. The financial statement that presents a shareholder ’s residual claim on

1 /45 Neoma Business School – Flavien Bourras, CFA

2. The income statement is best used to evaluate a company’s:

2 /45 Neoma Business School – Flavien Bourras, CFA

A) no net change in assets.

3 /45 Neoma Business School – Flavien Bourras, CFA

The terms of the sale are that payment is due in 30 days.

4 /45 Neoma Business School – Flavien Bourras, CFA

5. Squires & Johnson, Ltd., recorded €250,000 of depreciation expense in

5 /45 Neoma Business School – Flavien Bourras, CFA

6. Which of the following statements about cash received prior to the

The cash is recorded as:

A) deferred revenue, an asset.

6 /45 Neoma Business School – Flavien Bourras, CFA

7. When, at the end of an accounting period, a revenue has been recognized in

A) unbilled (accrued) revenue, an asset.

7 /45 Neoma Business School – Flavien Bourras, CFA

8. Which of the following best describes the role of financial statement

A) To provide information about a company’s performance

8 /45 Neoma Business School – Flavien Bourras, CFA

9. Information about management and director compensation are least likely to

9 /45 Neoma Business School – Flavien Bourras, CFA

A) permit flexibility in statement preparation.

10 /45 Neoma Business School – Flavien Bourras, CFA

11. An auditor determines that a company’s financial statements are prepared in

This exception is most likely to result in an audit opinion that is:

11 /45 Neoma Business School – Flavien Bourras, CFA

12 /45 Neoma Business School – Flavien Bourras, CFA

A) Statement of financial position.

13 /45 Neoma Business School – Flavien Bourras, CFA

14. The information provided by a balance sheet item is limited because of

A) measurement of its cost or value with reliability.

14 /45 Neoma Business School – Flavien Bourras, CFA

15. Accrued expenses (accrued liabilities) are:

A) expenses that have been paid.

15 /45 Neoma Business School – Flavien Bourras, CFA

A) An increase or decrease in sales.

16 /45 Neoma Business School – Flavien Bourras, CFA

The standard deviation of XYZ's expected return on equity is closest to:

17 /45 Neoma Business School – Flavien Bourras, CFA

A) have a mode that is less than its median.

18 /45 Neoma Business School – Flavien Bourras, CFA

19. For the investments shown in the table below:

Which of the following statements is most accurate?

A) The median is equal to the mode.

19 /45 Neoma Business School – Flavien Bourras, CFA

20 /45 Neoma Business School – Flavien Bourras, CFA

Given the following information on the two stocks,

the portfolio's standard deviation is closest to:

21 /45 Neoma Business School – Flavien Bourras, CFA

22. An investor has a $12,000 portfolio consisting of $7,000 in stock A with an

What is the investor's expected return on the portfolio?

22 /45 Neoma Business School – Flavien Bourras, CFA

23. The covariance:

A) can be positive or negative.

23 /45 Neoma Business School – Flavien Bourras, CFA

24. Which of the following rules is used to state an unconditional expected