CFA Level I

Question #1 of 18 Question ID: 1210918

The fundamental qualitative characteristics of financial statements as described by the IASB conceptual framework least likely
include:

A) relevance.

B) reliability.
C) faithful representation.

Question #2 of 18 Question ID: 1210922

A decrease in a firm's inventory turnover ratio is most likely to result from:

A) a write-down of inventory.

B) goods in inventory becoming obsolete.

C) decreasing purchases in a period of stable sales.

Question #3 of 18 Question ID: 1210920

Two firms are identical except that the first pays higher interest charges and lower dividends, while the second pays higher
dividends and lower interest charges. Both prepare their financial statements under U.S. GAAP. Compared to the first, the
second will have cash flow from financing (CFF) and earnings per share (EPS) that are:

CFF EPS

A) The same Higher

B) Lower Higher

C) Lower The same

Question #4 of 18 Question ID: 1210924

The following information is summarized from Famous, Inc.'s financial statements for the year, which ended December 31, 20X0:

Sales were $800,000.

Net profit margin was 20%.
Sales to assets was 50%.
Equity multiplier was 1.6.
Interest expense was $30,000.
Dividends declared were $32,000.

Famous, Inc.'s sustainable growth rate based on results from this period is closest to:

A) 3.2%.
B) 8.0%.
C) 12.8%.

Question #5 of 18 Question ID: 1210919

On January 1, Orange Computers issued employee stock options for 400,000 shares. Options on 200,000 shares have an
exercise price of $18, and options on the other 200,000 shares have an exercise price of $22. The year-end stock price was $24,
and the average stock price over the year was $20. The change in the number of shares used to calculate diluted earnings per
share for the year due to these options is closest to:

A) 20,000 shares.

B) 67,000 shares.

C) 100,000 shares.

Question #6 of 18 Question ID: 1210925

A snowmobile manufacturer that uses LIFO begins the year with an inventory of 3,000 snowmobiles, at a carrying cost of $4,000
each. In January, the company sells 2,000 snowmobiles at a price of $10,000 each. In July, the company adds 4,000
snowmobiles to inventory at a cost of $5,000 each. Compared to using a perpetual inventory system, using a periodic system for
the firm's annual financial statements would:

A) increase COGS by $2,000,000.

B) leave ending inventory unchanged.

C) decrease gross profit by $4,000,000.

Question #7 of 18 Question ID: 1210933

Which of the following is least likely to result in low-quality financial statements?

A) Unsustainable cash flows.

B) Activities that manage earnings.

C) Conservative accounting choices.

Question #8 of 18 Question ID: 1210927

Train Company paid $8,000,000 to acquire a franchise at the beginning of 20X5 that was expensed in 20X5. If Train had elected
to capitalize the franchise as an intangible asset and amortize the cost of the franchise over eight years, what effect would this
decision have on Train's 20X5 cash flow from operations (CFO) and 20X6 debt-to-assets ratio?

A) Both would be higher with capitalization.

B) Both would be lower with capitalization.

C) One would be higher and one would be lower with capitalization.

Question #9 of 18 Question ID: 1210931

Graphics, Inc. has a deferred tax asset of $4,000,000 on its books. As of December 31, it is probable that $2,000,000 of the
deferred tax asset's value will never be realized because of the uncertainty about future income. Under U.S. GAAP, Graphics,
Inc. should:

A) reduce the deferred tax asset account by $2,000,000.

B) establish a valuation allowance of $2,000,000.

C) establish an offsetting deferred tax liability of $2,000,000.

Question #10 of 18 Question ID: 1210928

Long-lived assets cease to be depreciated when the firm's management decides to dispose of the assets by:

A) sale.
B) abandonment.

C) exchange for another asset.

Question #11 of 18 Question ID: 1210930

An asset's tax base is most accurately described as the:

 A) tax-deductible expense that appears in the tax return in a given period.
B) amount of the asset that will not be expensed through the tax return in the future as the
economic benefits of the asset are realized.
C) amount of the asset to be expensed through the tax return in the future as the
economic benefits of the asset are realized.

Question #12 of 18 Question ID: 1210926

In the notes to its financial statements, Gilbert Company discloses a €400,000 reversal of an earlier write-down of inventory
values, which increases this inventory's carrying value to €2,000,000. It is most likely that:

A) the reasons for this reversal are also disclosed.

B) a gain of €400,000 appears on the income statement.
C) the net realizable value of this inventory is €2,000,000.

Question #13 of 18 Question ID: 1210934

If a firm's management wishes to use its discretion to increase operating cash flows, it is most likely to:

A) capitalize an expense.

B) decrease the allowance for uncollectible accounts.

C) change delivery terms from FOB destination to FOB shipping point.

Question #14 of 18 Question ID: 1210929

A firm that purchases a building that it intends to rent out for income would report this asset as investment property under:

A) U.S. GAAP only.

B) IFRS only.
C) both U.S. GAAP and IFRS.

Question #15 of 18 Question ID: 1210932

When a company redeems bonds before they mature, the gain or loss on debt extinguishment is calculated as the bonds'
carrying amount minus the:

A) face or par value of the bonds.

 B) amount required to redeem the bonds.
C) amortized historical cost of the bonds.

Question #16 of 18 Question ID: 1210923

Which of the following terms from the extended DuPont equation would an analyst least likely be able to obtain, given only a
company's common-size income statement and common-size balance sheet? The company's:

A) EBIT margin.
B) asset turnover.
C) financial leverage.

Question #17 of 18 Question ID: 1210935

An analyst is comparing two firms, one that reports under IFRS and one that reports under U.S. GAAP. An analyst is least likely
to do which of the following to facilitate a comparison of the companies?

A) Add the LIFO reserve to inventory for a United States-based firm that uses LIFO.

B) Add the present values of each firm’s future minimum operating lease payments to both
assets and liabilities.
C) Adjust the income statement of one of the firms if both have significant unrealized gains
or losses from changes in the fair values of trading securities.

Question #18 of 18 Question ID: 1210921

An analyst wants to compare the cash flows of two United States companies, one that reports cash flow using the direct method
and one that reports it using the indirect method. The analyst is most likely to:

A) convert the indirect statement to the direct method to compare the firms’ cash
expenditures.
B) adjust the reported CFO of the firm that reports under the direct method for depreciation
and amortization expense.
C) increase CFI for any dividends reported as investing cash flows by the firm reporting
cash flow by the direct method.