CFA Mock Exam 2 PREPARATION
CFA MOCK EXAM 2 PREPARATION FOR 2025/2026 WITH
COMPLETE QUESTIONS AND CORRECT DETAILED ANSWERS
(VERIFIED ANSWERS) |BRAND NEW VERSION!!
Ritu Jain, CFA, is preparing to leave her firm and join a new employer. Prior to
leaving the firm, Jain calls all her clients informing them of her decision to leave.
When asked by the clients, Jain states lack of confidence in the firm's leadership
as the reason for her departure and also mentions that more employees are likely
to leave soon. Jain has violated the Standard(s) relating:
A. only to loyalty.
B. only to preservation of confidentiality.
C. both to loyalty and to preservation of confidentiality.
A. Correct because Standard IV(A): Duties to Employers, Loyalty states that CFA
Institute members and candidates must act for the benefit of their employer and
not otherwise cause harm to their employer and Jain violates her duty of loyalty
to her employer by making disparaging and harmful statements about the firm to
its clients. Jain can call her clients to inform of her decision but cannot make
disparaging statements about her employer. Also according to Standard III(E)
relating to preservation of confidentiality, members and candidates preserve the
confidentiality of information communicated to them by their clients, prospective
clients, and former clients. No client related information is being disclosed and
information pertaining to an employer is not covered by this Standard. Hence only
the Standard relating to preservation of confidentiality has been violated.
All else being equal, in periods of rising prices and constant inventory quantities,
FIFO most likely results in a higher:
A. total asset turnover than LIFO.
B. working capital turnover than LIFO.
C. days of inventory on hand than LIFO.
1|Page
, CFA Mock Exam 2 PREPARATION
C. Correct because in an environment of rising inventory unit costs and constant
or increasing inventory quantities, FIFO (in comparison with weighted average
cost or LIFO) will allocate a lower amount of the total cost of goods available for
sale to cost of sales on the income statement and a higher amount to ending
inventory on the balance sheet. Accordingly, because cost of sales will be lower
under FIFO, a company's gross profit, operating profit, and income before taxes
will be higher. Days of inventory on hand = Number of days in period ÷ Inventory
turnover. Inventory turnover = Cost of sales ÷ Average inventory. As inventory is
higher under FIFO relative to LIFO, and Cost of sales is lower under FIFO relative to
LIFO, Inventory turnover is lower under FIFO. As such, Days of inventory on hand is
higher under FIFO relative to LIFO.
Revenue will not be affected
An option to abandon a capital investment at a future date if the NPV of the
project is less than expected is a type of:
A. sizing option.
B. timing option.
C. flexibility option.
A. Correct because an abandonment option is a type of sizing option. If after
investing the company can abandon the investment if the financial results are
disappointing, it has an abandonment option. At some future date, if the cash
flow from abandoning an investment exceeds the present value of the cash flows
from continuing the investment, the company should exercise the abandonment
option.
An analyst gathers the following information (in € thousands) about a company:
Purchases from suppliers 9,000
Increase in inventory 1,000
Increase in accounts payable 1,500
Cash paid to suppliers (in € thousands) is:
A. 7,500.
2|Page
, CFA Mock Exam 2 PREPARATION
B. 8,000.
C. 8,500.
A. Correct because cash paid to suppliers can be calculated by adjusting purchases
for the change in accounts payable. Accordingly, Cash paid to suppliers =
Purchases from suppliers - Increase in accounts payable = 9,000 - 1,500 = 7,500.
EBIT
is operating income
A random variable Y = exp(X) is lognormally distributed, where X is normally
distributed. The distribution of Y:
A. is skewed to the left.
B. is often used to model stock prices.
C. has a mean equal to exp(µ), where µ is the mean of X.
B. Correct because the lognormal distribution has been found to be a usefully
accurate description of the distribution of prices for many financial assets, which
includes stocks.
According to the converged accounting standards for revenue recognition,
revenue is recognized only when:
A. cash is received.
B. it is highly probable that it will not be subsequently reversed.
C. all performance obligations within a contract have been met while the
transaction price can be allocated to each identified performance obligation.
B Correct because revenue should only be recognized when it is highly probable
that it will not be subsequently reversed.
Under US GAAP, a valuation allowance is a reserve created against:
A.deferred tax assets only.
3|Page
, CFA Mock Exam 2 PREPARATION
B. deferred tax liabilities only.
C. both deferred tax assets and deferred tax liabilities.
A. Correct because if it were doubtful that future economic benefits would be
realized from a temporary difference, the temporary difference will not lead to
recognition of a deferred tax asset. If a deferred tax asset was recognized
previously, but there was sufficient doubt about the economic benefits being
realized, then, under IFRS, an existing deferred tax asset would be reversed. Under
US GAAP, a valuation allowance would be established to reduce the amount of the
deferred tax asset to the amount that is more likely than not to be realized.
An indicator variable used in a simple linear regression is best described as a
variable taking a value:
A. of either 0 or 1.
B. between 0 and 1.
C. in the range -1 to 1.
A. Correct because for some regression analyses, we could use an indicator
variable, or dummy variable, that takes on only the values 0 or 1 as the
independent variable.
The reversal of a prior fiscal year inventory write-down is:
A. prohibited.
B. recognized as a reduction in cost of sales.
C. recognized as an increase in other operating income.
B. Correct because the reversal of any write-down of inventories is recognized as a
reduction in cost of sales (reduction in the amount of inventories recognized as an
expense).
During the slowdown phase of the business cycle, inflation most likely:
A. remains moderate.
4|Page
CFA MOCK EXAM 2 PREPARATION FOR 2025/2026 WITH
COMPLETE QUESTIONS AND CORRECT DETAILED ANSWERS
(VERIFIED ANSWERS) |BRAND NEW VERSION!!
Ritu Jain, CFA, is preparing to leave her firm and join a new employer. Prior to
leaving the firm, Jain calls all her clients informing them of her decision to leave.
When asked by the clients, Jain states lack of confidence in the firm's leadership
as the reason for her departure and also mentions that more employees are likely
to leave soon. Jain has violated the Standard(s) relating:
A. only to loyalty.
B. only to preservation of confidentiality.
C. both to loyalty and to preservation of confidentiality.
A. Correct because Standard IV(A): Duties to Employers, Loyalty states that CFA
Institute members and candidates must act for the benefit of their employer and
not otherwise cause harm to their employer and Jain violates her duty of loyalty
to her employer by making disparaging and harmful statements about the firm to
its clients. Jain can call her clients to inform of her decision but cannot make
disparaging statements about her employer. Also according to Standard III(E)
relating to preservation of confidentiality, members and candidates preserve the
confidentiality of information communicated to them by their clients, prospective
clients, and former clients. No client related information is being disclosed and
information pertaining to an employer is not covered by this Standard. Hence only
the Standard relating to preservation of confidentiality has been violated.
All else being equal, in periods of rising prices and constant inventory quantities,
FIFO most likely results in a higher:
A. total asset turnover than LIFO.
B. working capital turnover than LIFO.
C. days of inventory on hand than LIFO.
1|Page
, CFA Mock Exam 2 PREPARATION
C. Correct because in an environment of rising inventory unit costs and constant
or increasing inventory quantities, FIFO (in comparison with weighted average
cost or LIFO) will allocate a lower amount of the total cost of goods available for
sale to cost of sales on the income statement and a higher amount to ending
inventory on the balance sheet. Accordingly, because cost of sales will be lower
under FIFO, a company's gross profit, operating profit, and income before taxes
will be higher. Days of inventory on hand = Number of days in period ÷ Inventory
turnover. Inventory turnover = Cost of sales ÷ Average inventory. As inventory is
higher under FIFO relative to LIFO, and Cost of sales is lower under FIFO relative to
LIFO, Inventory turnover is lower under FIFO. As such, Days of inventory on hand is
higher under FIFO relative to LIFO.
Revenue will not be affected
An option to abandon a capital investment at a future date if the NPV of the
project is less than expected is a type of:
A. sizing option.
B. timing option.
C. flexibility option.
A. Correct because an abandonment option is a type of sizing option. If after
investing the company can abandon the investment if the financial results are
disappointing, it has an abandonment option. At some future date, if the cash
flow from abandoning an investment exceeds the present value of the cash flows
from continuing the investment, the company should exercise the abandonment
option.
An analyst gathers the following information (in € thousands) about a company:
Purchases from suppliers 9,000
Increase in inventory 1,000
Increase in accounts payable 1,500
Cash paid to suppliers (in € thousands) is:
A. 7,500.
2|Page
, CFA Mock Exam 2 PREPARATION
B. 8,000.
C. 8,500.
A. Correct because cash paid to suppliers can be calculated by adjusting purchases
for the change in accounts payable. Accordingly, Cash paid to suppliers =
Purchases from suppliers - Increase in accounts payable = 9,000 - 1,500 = 7,500.
EBIT
is operating income
A random variable Y = exp(X) is lognormally distributed, where X is normally
distributed. The distribution of Y:
A. is skewed to the left.
B. is often used to model stock prices.
C. has a mean equal to exp(µ), where µ is the mean of X.
B. Correct because the lognormal distribution has been found to be a usefully
accurate description of the distribution of prices for many financial assets, which
includes stocks.
According to the converged accounting standards for revenue recognition,
revenue is recognized only when:
A. cash is received.
B. it is highly probable that it will not be subsequently reversed.
C. all performance obligations within a contract have been met while the
transaction price can be allocated to each identified performance obligation.
B Correct because revenue should only be recognized when it is highly probable
that it will not be subsequently reversed.
Under US GAAP, a valuation allowance is a reserve created against:
A.deferred tax assets only.
3|Page
, CFA Mock Exam 2 PREPARATION
B. deferred tax liabilities only.
C. both deferred tax assets and deferred tax liabilities.
A. Correct because if it were doubtful that future economic benefits would be
realized from a temporary difference, the temporary difference will not lead to
recognition of a deferred tax asset. If a deferred tax asset was recognized
previously, but there was sufficient doubt about the economic benefits being
realized, then, under IFRS, an existing deferred tax asset would be reversed. Under
US GAAP, a valuation allowance would be established to reduce the amount of the
deferred tax asset to the amount that is more likely than not to be realized.
An indicator variable used in a simple linear regression is best described as a
variable taking a value:
A. of either 0 or 1.
B. between 0 and 1.
C. in the range -1 to 1.
A. Correct because for some regression analyses, we could use an indicator
variable, or dummy variable, that takes on only the values 0 or 1 as the
independent variable.
The reversal of a prior fiscal year inventory write-down is:
A. prohibited.
B. recognized as a reduction in cost of sales.
C. recognized as an increase in other operating income.
B. Correct because the reversal of any write-down of inventories is recognized as a
reduction in cost of sales (reduction in the amount of inventories recognized as an
expense).
During the slowdown phase of the business cycle, inflation most likely:
A. remains moderate.
4|Page
