CFA Exam Questions Chap 4 & 5 Flashcards
A company’s current financial position would best be evaluated using the:
a. Balance Sheet
b. Income statement
c. Statement of cash flows
A is correct. The balance sheet portrays the current financial position. The income statement and statement of cash flows present different aspects of performance
A company has the following information related to the sale of its products. Under the accrual basis of accounting, how much net revenue would be reported on the income statement. Revenue $1,000,000 Returns of goods sold $100,000 Cash Collected $800,000 Cost of goods sold $700,000 a. $200,000 b. $900,000 c. $1,000,000
B is the correct answer. $1,000,000-$100,000 = $900,000
Which of the following elements of financial statements is most closely related to measurement of performance?
a. Assets
b. Expenses
c. Liabilities
B is correct. The elements of financial statements related to the measure of performance are income and expenses
Which of the following is treated as other comprehensive income?
a. Unrealized gains and losses on sale of property, plant and equipment
b. Commercial Paper
c. Shareholder’s Equity
d. Unrealized gains and losses on derivatives
D is correct. Unrealized gains and losses on derivatives is treated as other comprehensive income.
Which of the following cash flows is NOT used to assess a company’s cash flow available to debt and equity holders?
a. EBITDA
b. Free cash flow to equity (FCFE)
c. Free cash flow to the firm (FCFF)
d. None of the above
A is correct. FCFE and FCFF are both used to assess a company’s cash flow available to debt and equity holders.
An intangible asset
a. Is on the balance sheet
b. Is amortized
c. Is on the statement of cash flows
d. Is tested annually for impairment
D is correct. Intangible assets are tested annually for impairment.
When an analyst is concerned about a company’s ability to meet short term debt
obligations, the analyst is concerned about a company’s
a. Solvency
b. Liquidity
c. None of the above
B is correct. Liquidity is the ability to meet short term debt obligations
Debt due within one year is considered
a. Current
b. Preferred
c. Convertible
A is correct. Current liabilities are those liabilities, including debt, due within one year. Preferred refers to a class of stock. Convertible refers to a feature of bonds (or preferred stock) allowing the holders to convert the instrument into common stock.
When a company pays rent in advance, its balance sheet will reflect a reduction in :
a. Assets and liabilities
b. Assets and shareholder’s equity
c. One category of assets and an increase in another
C is correct. Paying rent in advance will reduce cash and increased prepaid expenses, both of
which are assets.
All of the following are current assets except:
a. Cash
b. Goodwill
c. Inventories
B is correct. Goodwill is a intangible asset and the others are all current assets
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
C is correct. Accrued liabilities are expenses that have been reported on a company’s income
statement but have not yet been paid.
Which of the following is most likely to appear in the operating section of a cash flow statement under the indirect method? a. Net income b. Cash paid to suppliers c. Cash received from customers
A is correct. Under the indirect method, the operating section would begin with net income and
adjust it to arrive at operating cash flow. The other two items would appear in the operating
section under the direct method.
The sale of a building for cash would be classified as what type of activity on the cash flow statement?
a. Operating
b. Investing
c. Financing
Bis correct. Purchases and sales of long-term assets are considered investing activities. Note that if the transaction has involved the exchange of a building for other than cash (for example another building, common stock of another company, or a long-term note receivable), it would have been considered a significant noncash activity.
Which of the following is an example of a financing activity on the cash flow statement under US GAAP?
a. Payment of interest
b. Receipt of dividends
c. Payment of dividends
C is correct. Payment of dividends is a financing activity under US GAAP. Payment of interest and receipt of dividends are included in operating cash flows under US GAAP.
A company’s profitability for a period would best be evaluated using the
a. Balance sheet
b. Income statement
c. Statement of cash flows
B is correct. Profitability is the performance aspect measured by the income statement. The balance sheet portrays the current financial position. The statement of cash flows presents a different aspect of performance.
Which of the following items would most likely be classified as an operating activity?
a. Issuance of debt
b. Acquisition of a competitor
c. Sale of automobiles by automobile dealer
C is correct
Which of the following elements represents a residual claim?
a. Asset
b. Liability
c. Owner’s Equity
C is correct
An analyst has projected that a company will have assets of $2,000 at year end and liabilities of $1,200. The analyst’s projection of total owners’ equity should be closest to a. $800 b. $2,000 c. $3,200
A is correct. Assets must equal liabilities plus owners’’ equity and, therefore, $2,000=$1,200 + owners’ equity. Owners’ equity must be $800.
An analyst has collected the following information regarding a company in advance of its year-end earnings announcement (in millions).
Estimated Net Income $200
Beginning Retained Earnings $1,400
Estimated Distribution to Owners $100
The analyst’s estimate of ending retained earnings (in millions) should be closest to a. $1,300 b. $1,500 c. $1,700
B is correct. Beginning retained earnings $1,400 \+ Net Income $200 - Distributions to owners ($100) = Ending retained earnings $1,500
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. Deferred revenue, an asset
b. Accrued revenue, a liability
c. Unbilled (accrued revenue), a liability
Cis correct. Cash received prior to revenue recognition increases cash and deferred or unearned revenue. This is a liability until the company provides the promised goods or services
Expenses on the income statement may be grouped by
A. nature but not by function
B. function, but not by nature
C. either function or nature
C IAS no 1 states that expenses may be categorized by either nature or function
An example of an expense classifcication by function is
A. tax expense
B. interest expense
C. cost of goods sold
C Cost of goods sold is a classification by function. The other two expenses represent classifications by nature
Denali Ltd, a manufacturing co, had the follwing income statement info Rev $4MM CGS $3MM OOE $.500 Int Exp $.100 Tax Exp $.120 Denaili gross profit is equal to A. $280M B. $500M C. $1MM
C Gross margin is revenue minus CGS. Answer A represents net income Answer B represents operating income
At the beg of 09 Florida Road Const entered into a contract to build a road for the gov. Con will take 4 yrs. The following info as of 31 Dec 09 Total Rev according to contract $10MM Total Expected Cost $8MM Cost incurred during 09' $1.2MM Assume % of completion, how much revenue will be reported in 09' A. None B. $300M C. $1.5MM
A Under the completed contract method, no revenue would be reported until the project is completed
