CFA Level 1
George Hutchins, CFA, would like to perform a paired comparisons test on returns for
the stocks of two real estate investment trusts. The test statistic that Hutchins should
select for the paired comparisons test is the: - Answer t-Stat
Effective annual yield
Money Market Yield - Answer EAY = [(1 + HPY)^(365 / t)] − 1
rMM = HPY × (360/t);
In the short run, a perfectly competitive firm's supply curve is: - Answer upward sloping
and its demand curve is perfectly elastic.
Which of the following most accurately describes cash flow classification under U.S.
GAAP and IFRS? - Answer Dividends paid are a financing activity under U.S. GAAP
and dividends received may be shown as an operating or investing activity under IFRS.
U.S. GAAP requires unrealized gains and losses on available-for-sale securities to be
reported: - Answer as other comprehensive income on the statement of changes in
owners' equity. Unrealized gains and losses on actively traded securities would be
reported in the income statement.
A financial analyst should treat deferred tax liabilities (DTLs) as equity if the DTLs are: -
Answer expected to increase each period.
The major benefit of financial reporting standards is that they: - Answer ensure that
financial reports are usable by a wide range of audiences.
Other things equal, what impact will increasing days sales in payables have on
operating cash flow? - Answer Higher operating cash flow.
Service costs for a defined benefit pension plan are recognized on the income
statement under: - Answer Both IFRS and U.S. GAAP.;
Service costs, which are the additional benefits that employees have earned during the
period, are recognized as an expense on the current period income statement under
both IFRS and U.S. GAAP.
JME Construction always uses the percentage of completion method of recognizing
revenue. During 2004 JME signs a contract in the amount of $10 million with the
following data available:
Costs incurred to date $2,200,000
Billings to date $2,000,000
Cash collected $1,750,000
Total cost of project $8,800,000
How much gross profit should JME recognize for 2004? - Answer stage of completion =
25%(2..8)
,CFA Level 1
revenue to be recognized = 0.25 × 10 million = 2.5 million
gross profit = 2.5 million - 2.2 million = 300,000
(Study Session 7, Module 23.3, LOS 23.b)
A U.S. company uses the LIFO method to value its inventory for their income tax return.
For its financial statements prepared for shareholders, the company may: - Answer only
use the LIFO method.
Which of the following items for a financial services company is least likely to be
considered an operating item on the income statement? - Answer Income tax expense.
For a financial services company, interest income, interest expense, and financing
expenses are likely considered operating activities. For both financial and nonfinancial
companies, income tax expense is a non-operating item that is reported within "income
from continuing operations" as opposed to "operating profit" as with the other answer
choices. Therefore, of the three choices, income tax expense is least likely to be
considered an operating item.
Which of the following statements regarding inflation is most accurate? - Answer
Inflation is a persistent increase in the general price level of goods and services.
Over the last five years, in the country of Midlothian, both the labor supply and the real
stock of physical capital have increased by 20% and real GDP increased 22%. The
reason that real GDP growth was greater than input growth over the period is most
likely that: - Answer total factor productivity increased.
Any excess of real GDP growth over the rate of growth in labor and capital indicates
there has been an increase in total factor productivity.
Which of the following is least likely to be considered a stated goal of the International
Accounting Standards Board (IASB)? - Answer The IASB has four stated goals:
Develop global accounting standards requiring transparency, comparability, and high
quality in financial statements.
Promote the use of global accounting standards.
Account for the needs of emerging markets and small firms when implementing global
accounting standards.
Achieve convergence between various national accounting standards and global
accounting standards.
A company issues an annual-pay bond with a face value of $135,662, maturity of 4
years, and 7% coupon, while market interest rates for its bonds are 8%. What is the
unamortized discount at the end of the first year? - Answer Face value of bonds =
$135,662.
, CFA Level 1
Proceeds from bond sale: I/Y = 8.00%; N = 4; PMT = $135,662 × 0.07 = $9,496.34; FV
= $135,662; CPT PV = $131,169
Unamortized discount at issuance = $135,662 - $131,169 = $4,493.
First year interest expense = $131,169 × 0.08 = $10,494.
Coupon payment = $135,662 × 0.07 = $9,496.
Change in discount = $10,494 - $9,496 = $998.
Discount at the end of first year = $4,493 - $998 = $3,495.
(Study Session 8, Module 30.1, LOS 30.a)
Which of the following statements about accounting procedures and their impact on the
statement of cash flows is least valid? All else equal: - Answer A nonprofitable company
that uses LIFO to account for inventory will have higher total cash flow than a
nonprofitable company that uses FIFO during a period of rising prices.
Achieved
Because of the impact of income taxes, a profitable company that accounts for
inventory using LIFO will have higher total cash flow than a profitable company that
uses FIFO. The company that uses LIFO will have higher cost of goods sold, resulting
in lower net income and thus lower taxes.
The other statements are accurate:
A company that issues common stock is not required to pay dividends (which would
reduce cash flow from financing). Thus, it may have the same CFF as a firm that issues
debt since interest paid on debt is a component of CFO.
When a company issues bonds at a premium, the proceeds raised at issuance (CFF
inflow) are greater than the par value repaid at maturity (CFF outflow). For bonds issued
at par, the CFF inflow at issuance is equal to the CFF outflow at maturity.
(Study Session 7, Module 25.2, LOS 25.f)
Which of the following is an a priori probability? - Answer On a random draw, the
probability of choosing a stock of a particular industry from the S&P 500.
A priori probability is based on formal reasoning and inspection. Given the number of
stocks in the airline industry in the S&P500 for example, the a priori probability of
selecting an airline stock would be that number divided by 500.
A researcher determines that the mean annual return over the last 10 years for an
investment strategy was greater than that of an index portfolio of equal risk with a
statistical significance level of 1%. To determine whether the abnormal portfolio returns
George Hutchins, CFA, would like to perform a paired comparisons test on returns for
the stocks of two real estate investment trusts. The test statistic that Hutchins should
select for the paired comparisons test is the: - Answer t-Stat
Effective annual yield
Money Market Yield - Answer EAY = [(1 + HPY)^(365 / t)] − 1
rMM = HPY × (360/t);
In the short run, a perfectly competitive firm's supply curve is: - Answer upward sloping
and its demand curve is perfectly elastic.
Which of the following most accurately describes cash flow classification under U.S.
GAAP and IFRS? - Answer Dividends paid are a financing activity under U.S. GAAP
and dividends received may be shown as an operating or investing activity under IFRS.
U.S. GAAP requires unrealized gains and losses on available-for-sale securities to be
reported: - Answer as other comprehensive income on the statement of changes in
owners' equity. Unrealized gains and losses on actively traded securities would be
reported in the income statement.
A financial analyst should treat deferred tax liabilities (DTLs) as equity if the DTLs are: -
Answer expected to increase each period.
The major benefit of financial reporting standards is that they: - Answer ensure that
financial reports are usable by a wide range of audiences.
Other things equal, what impact will increasing days sales in payables have on
operating cash flow? - Answer Higher operating cash flow.
Service costs for a defined benefit pension plan are recognized on the income
statement under: - Answer Both IFRS and U.S. GAAP.;
Service costs, which are the additional benefits that employees have earned during the
period, are recognized as an expense on the current period income statement under
both IFRS and U.S. GAAP.
JME Construction always uses the percentage of completion method of recognizing
revenue. During 2004 JME signs a contract in the amount of $10 million with the
following data available:
Costs incurred to date $2,200,000
Billings to date $2,000,000
Cash collected $1,750,000
Total cost of project $8,800,000
How much gross profit should JME recognize for 2004? - Answer stage of completion =
25%(2..8)
,CFA Level 1
revenue to be recognized = 0.25 × 10 million = 2.5 million
gross profit = 2.5 million - 2.2 million = 300,000
(Study Session 7, Module 23.3, LOS 23.b)
A U.S. company uses the LIFO method to value its inventory for their income tax return.
For its financial statements prepared for shareholders, the company may: - Answer only
use the LIFO method.
Which of the following items for a financial services company is least likely to be
considered an operating item on the income statement? - Answer Income tax expense.
For a financial services company, interest income, interest expense, and financing
expenses are likely considered operating activities. For both financial and nonfinancial
companies, income tax expense is a non-operating item that is reported within "income
from continuing operations" as opposed to "operating profit" as with the other answer
choices. Therefore, of the three choices, income tax expense is least likely to be
considered an operating item.
Which of the following statements regarding inflation is most accurate? - Answer
Inflation is a persistent increase in the general price level of goods and services.
Over the last five years, in the country of Midlothian, both the labor supply and the real
stock of physical capital have increased by 20% and real GDP increased 22%. The
reason that real GDP growth was greater than input growth over the period is most
likely that: - Answer total factor productivity increased.
Any excess of real GDP growth over the rate of growth in labor and capital indicates
there has been an increase in total factor productivity.
Which of the following is least likely to be considered a stated goal of the International
Accounting Standards Board (IASB)? - Answer The IASB has four stated goals:
Develop global accounting standards requiring transparency, comparability, and high
quality in financial statements.
Promote the use of global accounting standards.
Account for the needs of emerging markets and small firms when implementing global
accounting standards.
Achieve convergence between various national accounting standards and global
accounting standards.
A company issues an annual-pay bond with a face value of $135,662, maturity of 4
years, and 7% coupon, while market interest rates for its bonds are 8%. What is the
unamortized discount at the end of the first year? - Answer Face value of bonds =
$135,662.
, CFA Level 1
Proceeds from bond sale: I/Y = 8.00%; N = 4; PMT = $135,662 × 0.07 = $9,496.34; FV
= $135,662; CPT PV = $131,169
Unamortized discount at issuance = $135,662 - $131,169 = $4,493.
First year interest expense = $131,169 × 0.08 = $10,494.
Coupon payment = $135,662 × 0.07 = $9,496.
Change in discount = $10,494 - $9,496 = $998.
Discount at the end of first year = $4,493 - $998 = $3,495.
(Study Session 8, Module 30.1, LOS 30.a)
Which of the following statements about accounting procedures and their impact on the
statement of cash flows is least valid? All else equal: - Answer A nonprofitable company
that uses LIFO to account for inventory will have higher total cash flow than a
nonprofitable company that uses FIFO during a period of rising prices.
Achieved
Because of the impact of income taxes, a profitable company that accounts for
inventory using LIFO will have higher total cash flow than a profitable company that
uses FIFO. The company that uses LIFO will have higher cost of goods sold, resulting
in lower net income and thus lower taxes.
The other statements are accurate:
A company that issues common stock is not required to pay dividends (which would
reduce cash flow from financing). Thus, it may have the same CFF as a firm that issues
debt since interest paid on debt is a component of CFO.
When a company issues bonds at a premium, the proceeds raised at issuance (CFF
inflow) are greater than the par value repaid at maturity (CFF outflow). For bonds issued
at par, the CFF inflow at issuance is equal to the CFF outflow at maturity.
(Study Session 7, Module 25.2, LOS 25.f)
Which of the following is an a priori probability? - Answer On a random draw, the
probability of choosing a stock of a particular industry from the S&P 500.
A priori probability is based on formal reasoning and inspection. Given the number of
stocks in the airline industry in the S&P500 for example, the a priori probability of
selecting an airline stock would be that number divided by 500.
A researcher determines that the mean annual return over the last 10 years for an
investment strategy was greater than that of an index portfolio of equal risk with a
statistical significance level of 1%. To determine whether the abnormal portfolio returns
