CFAI - Mock 1.1

Question 1

Finacial statement essential (required) part of financial statement:

Answer 1

The notes (also sometimes referred to as footnotes) that accompany the four financial statements are required and are an integral part of the complete set of financial statements. The notes also disclose information about the accounting policies, methods, and estimates used to prepare the financial statements.

Auditors report and management commentary are not integral part of financial statements.

Management commentary: nature of the business, past results, and future outlook

Question 2

4 Main financial statements:

Answer 2

Balance sheets: show what a company owns and what it owes at a fixed point in time.

Income statements: show how much money a company made and spent over a period of time.

Cash flow statements: show how much cash a company generated and spent over a period of time.

Statements of shareholders’ equity: show changes in the ownership of a company over a period of time.

Question 3

Restructuring cost

Answer 3

Although it is not a recurring cost, in US GAAP, restructuring cost is charged as operating item.

Question 4

The following data are available on a company:
Metric ($ millions)
Total assets 145
Total revenues 282
Total expenses 241
Research and development expenses 12
Under a common-size analysis, the value used for research and development expenses is closest to:

4.2%.
8.3%.
5.0%.

Answer 4

Identify the Income Statement and use the revenue amount for the common-size analysis.

A is correct. The appropriate base for a common-size income statement is revenue. As such, the value used for research and development expenses is $12 million/$282 million × 100 = 4.25%.

Question 5

Which of the following is the most likely reason for an analyst to choose the direct method rather than the indirect method for analyzing a firm’s operating cash flows?

Answer 5

To identify operating cash flows by source and by use

Question 6

FCFF question 74

Question 7

An analyst gathers the following information (in £ thousands) about a company:
EBITDA 10,000
Net interest expense 500
Current tax expense 1,000
Total debt 25,000
Based only on this information, the funds from operations to debt ratio is:

34%.
38%.
40%.

Answer 7

FFO = funds from operations, defined as EBITDA minus net interest expense minus current tax expense (plus or minus all applicable adjustments).

A is correct because “FFO (Funds from operations) to debt = FFO / Total debt… FFO = funds from operations, defined as EBITDA minus net interest expense minus current tax expense (plus or minus all applicable adjustments).” Accordingly, FFO = 10,000 – 500 – 1,000 = 8,500; thus FFO to debt = FFO / Total debt = 8,500 / 25,000 = 0.34 = 34%.

Question 8

Inventory Item Amount € (thousands)
Raw material aluminum costs 150,000
Storage of finished cans 15,000
Wasted aluminum materials from abnormal production errors during the year 500
Transportation-in costs 640
Tax-related duties 340
Administrative overhead 7,500
Trade discounts due to volume purchases throughout the year 520
The total costs included in inventory (in € thousands) for the year are closest to:

€150,980.
€150,460.
€149,820.

Answer 8

Cost incurred to have the goods are included in the inventory total cost.

Total inventory cost = Raw materials + Transportation fee + Tax-related duties - Trade discount

150,000 + 640 + 340 - 520 = 150,460

Question 9

Which of the following statements regarding inventory valuation is most accurate?

IFRS defines market value as net realizable value less a normal profit margin.
Both IFRS and US GAAP allow the reversal of write-downs back to the original cost.
Both IFRS and US GAAP allow agricultural inventories to be valued at net realizable value.

Answer 9

C is correct. Both IFRS and US GAAP allow agricultural inventories to be valued at net realizable value.

Question 10

NRV

Answer 10

total amount of money an asset might generate upon its sale, less a reasonable estimate of the costs, fees, and taxes associated with that sale or disposal. Net realizable value (NRV) accounts for the value of an asset in terms of the amount it would receive upon sale, minus selling costs.

Question 11

The notes to the financial statements of a company reporting under US GAAP contain the following information for the year 2014:
Note 11: Property and Equipment (all figures in $ thousands)
Depreciation expense for 2014 is $362. This amount includes capitalized interest of $143.
Interest is allocated and capitalized to construction in progress by applying the firm’s cost of borrowing rate to qualifying assets. Interest capitalized in 2014 is $170.

Answer 11

Because the tax income won’t be affected, the cash flow from operations will not change.

Ignoring the effects of income taxes, the expensing of previously capitalized interest most likely causes the company’s cash flow from operations to be:

higher.
unaffected.
lower.

Question 12

Question 83 - Impairment
Because of significant changes in the marketplace, the demand for a company’s product has fallen and is not expected to recover to previous levels. The following information is related to the patent under which the product is produced:
Item Description $ thousands
Carrying value amount 36,000
Undiscounted expected future cash flows 38,000
Present value of expected future cash flows 32,000
Fair value if sold 34,000
Costs to sell 4,000
Which of the following statements is most accurate? The patent is impaired under:

IFRS only.
both IFRS and US GAAP.
US GAAP only.

Answer 12

A is correct. Under IFRS (International Financial Reporting Standards), first determine the recoverable amount, which is the higher of:

1. value in use (the present value of the expected future cash flows) = $32,000 or
2. fair value minus costs to sell = $34,000 – 4,000 = $30,000

The recoverable amount ($32,000) is lower than the carrying value ($36,000). Therefore, the asset is impaired and should be written down to that amount.

Under US GAAP, to assess impairment, the carrying value ($36,000) is compared with the undiscounted expected future cash flows ($38,000). In this case, the carrying value is lower so the patent is not impaired.

Question 13

Impairment is a non-cash item, so it won’t affect the cash flow statement.

Question 14

An analyst gathers the following information about a company:
Year 1 Forecasted Yearly Change
Revenue €100,000 10%
Cost of sales €40,000 5%
Operating expenses €20,000 5%
The forecasted tax rate is 30%. Based only on this information, forecasted net income in Year 2 is:

€14,100.
€32,900.
€47,000.

Answer 14

Asking about the income, not the tax expense.
Make sure to read the question carefully.

Question 15

After a firm presents a minimum required number of years of GIPS®-compliant performance, the firm must present an additional year of performance each year, building up to a minimum of:

10 years of GIPS-compliant performance.
5 years of GIPS-compliant performance.
15 years of GIPS-compliant performance.

Answer 15

A is correct because after a firm presents a minimum of five years of GIPS-compliant performance, the firm must present an additional year of performance each year, building up to a minimum of 10 years of GIPS-compliant performance.

Question 16

To be compliant with the GIPS standards, after a firm presents five years of performance history, it must build up to a minimum of:

7 years of compliant performance presentation.
10 years of compliant performance presentation.
15 years of compliant performance presentation.

Answer 16

B is correct because the GIPS standards state: “A firm is required to initially present, at a minimum, five years of annual investment performance that is compliant with the GIPS standards. If the composite or pooled fund has been in existence less than five years, the firm must present performance since the composite or pooled fund inception date. Prospectively, the firm must present an additional year of performance each year, building up to a minimum of 10 years of GIPS-compliant performance.”

Question 17

The purpose of composites in a GIPS-compliant performance presentation is to:
A)
present overall firm performance in a single statistic that is comparable across firms.
Incorrect Answer
B)
provide information about a firm’s performance in various asset classes or investment strategies.
Correct Answer
C)
clearly distinguish the entity that is presented to the public as a GIPS-compliant firm.
Incorrect Answer

Answer 17

The purpose of composites is to give clients and prospects information about a firm’s past performance managing investments in various asset classes or investment strategies.

(Module 72.1, LOS 72.c)

Question 18

McGregor Investment Management promotes itself as a fixed-income investment management firm. The vast majority of the discretionary portfolios it manages are fixed-income portfolios. McGregor does, however, manage a few portfolios utilizing a growth equity investment strategy, but the firm has no intention of ever promoting this strategy. Under the Global Investment Performance Standards (GIPS), must these portfolios be included in a composite?

A)
Yes, because the portfolios are discretionary.
Correct Answer
B)
No, because the firm does not normally manage portfolios to a growth equity strategy and does not promote it to potential clients.
Incorrect Answer
C)
Yes, because the portfolios are managed to a widely recognized investment strategy.
Incorrect Answer

Answer 18

GIPS require all discretionary portfolios to be included in a composite. Thus, McGregor must include the growth equity portfolios in a composite.

(Module 72.1, LOS 72.c)

Question 19

Which of the following parties may adopt and claim compliance with Global Investment Performance Standards (GIPS)?

A)
An investment management firm located in Indonesia.
Correct Answer
B)
A software firm that developed a software package that assists investment firms in achieving GIPS compliance.
Incorrect Answer
C)
The chief compliance officer for a regional money manager.
Incorrect Answer

Answer 19

Only an investment firm that actually manages assets can claim compliance with GIPS.

(Module 72.1, LOS 72.a)

C is wrong because GIPS only applies to firms, not individuals.

Question 20

Lora Murphy has an account at Ferrell Investments, a GIPS-compliant firm. Murphy invests in small-cap value stocks and pays Ferrell a standard fee to execute her buy and sell orders, but does not permit her account manager to initiate trades on her behalf. According to GIPS, is Ferrell required to include Murphy’s portfolio in their small-cap value stock composite?

A)
No, because the portfolio is non-discretionary.
Correct Answer
B)
No, because constructing composites is voluntary.
Incorrect Answer
C)
Yes, because the portfolio is consistent with the defined strategy for this composite.
Incorrect Answer

Answer 20

Because this portfolio’s owner restricts the firm from implementing its own investment strategy, the firm should designate this portfolio as non-discretionary and should not include it in the firm’s composites.

(Module 72.1, LOS 72.d)

discretionary portfolio is the portfolio that is managed by someone else/.

Question 21

When verifying a firm’s compliance with Global Performance Investment Standards (GIPS), the verifier must:

A)
attest that the firm’s processes and procedures are established to present performance in accordance with GIPS requirements.
Correct Answer
B)
clearly identify the composites for which verification has been performed.
Incorrect Answer
C)
disclose whether the verification was performed by the firm’s internal auditors or a third party.
Incorrect Answer

Answer 21

Important

The verifier must attest that the firm has complied with all GIPS requirements for composite construction on a firm-wide basis and that the firm’s processes and procedures are established to present performance in accordance with the calculation methodology, data, and format requirements of GIPS. Verification is not a GIPS requirement. If performed, verification applies to the firm as a whole, not to individual composites, and must be performed by an independent third party, not the firm itself.

If a firm chooses to pursue verification, it must be performed by a third party, not by the firm itself, on a firmwide basis.

Question 22

Nominal Rf interest rate

Answer 22

Nominal Rf interest rate = Real Rf interest rate + Inflation premium

Question 23

An account has a stated annual interest rate of 3.6% with monthly compounding. The number of years it will take for an initial investment in the account to double is closest to:

19.3.*
19.6.
20.0.

Answer 23

know how to use Ln

Question 24

Cross-Sectional versus Time-Series versus Panel Data

Year 1	Year 2 Client 1	10.2%	–5.4% Client 2	5.3%	1.2% Client 3	12.5%	–2.3%

Answer 24

C is correct because “[c]ross-sectional data are a list of the observations of a specific variable from multiple observational units at a given point in time.” Here, each column of data in the table represents cross-sectional portfolio return data across the three clients.

A is incorrect because “[p]anel data consist of observations through time on one or more variables for multiple observational units.” Here, the entire table (not each column or rows) is an example of panel data showing clients’ portfolio returns by year.

B is incorrect because “[t]ime-series data are a sequence of observations for a single observational unit of a specific variable collected over time and at discrete and typically equally spaced intervals of time, such as daily, weekly, monthly, annually, or quarterly.” Here, each row (not column) is a time series of data that represents a client’s portfolio return over the two-year period.

Question 25

Which of the following visualizations is most appropriate for making a snapshot comparison amongst categories of data?

Bar chart
Line chart
Histogram

Answer 25

A is correct because “[b]ar charts provide a snapshot to show the comparison between categories of data.”

B is incorrect because a line chart is most appropriate for making comparisons over time, not amongst categories. “A line chart is a type of graph used to visualize ordered observations. Often a line chart is used to display the change of data series over time.”

C is incorrect because a histogram is most appropriate for displaying the distribution of numerical data, not comparisons amongst categorical data. “A histogram is a chart that presents the distribution of numerical data by using the height of a bar or column to represent the absolute frequency of each bin or interval in the distribution.” “[T]he histogram is an efficient graphical tool to present the frequency distribution of numerical data. The frequency distribution of categorical data can be plotted in a similar type of graph called a bar chart.”

Question 26

question 34

Answer 26

addition rule is P(W1 or W2) = P(W1) + P(W2) – P(W1W2)

P(W2W1) = P(W2|W1)P(W1)

Question 27

Question 36 - Covariance

Question 28

Question 38 - normal distribution

Question 29

Two types of sampling methods

Answer 29

probability sampling and non-probability sampling. Probability sampling gives every member of the population an equal chance of being selected.

Question 30

Probability sampling

Answer 30

Simple random sample

Systematic sample (eg even number)

Stratified sample (select elements of each clusters)

Cluster sample (selected the entire cluster)

Question 31

question 42 ?

Question 32

If the reduction of a product’s price increases total revenue, demand is best described as:

inelastic.
unit elastic.
elastic.

Answer 32

Elastic is correct. A product’s demand is elastic if demand increases by a greater percentage than the percentage price change when prices are reduced. For example, if a 1 percent price reduction increases the quantity sold by more than 1 percent, total revenue increases and demand is said to be elastic.

A is incorrect. If demand is inelastic, a price reduction would reduce total revenue.

B is incorrect. If demand is unit elastic, a price reduction leaves total revenue unchanged.

Question 33

The inflation rate most likely:

lags the movement of the business cycle.
moves in line with the business cycle.
leads the movement of the business cycle.

Answer 33

knew the concept during didn’t understand the way how it was said.

A is correct because “[i]n general, the inflation rate is pro-cyclical (that is, it goes up and down with the cycle), but with a lag of a year or more”.

Question 34

Cyber threats are most likely an example of:

event risk. (election)
thematic risk. (cyber threats, climate change)
exogenous risk. (earthquake, covid)

Answer 34

B is correct because “[c]yber threats are another example of thematic risk. Cyber risks include any attempt to expose, alter, disable, destroy, steal, or gain information through unauthorized access to or unauthorized use of computer systems.”

A is incorrect because “[e]vent risk evolves around set dates, such as elections, new legislation, or other date-driven milestones, such as holidays or political anniversaries, known in advance.”

C is incorrect because “[e]xogenous risk is a sudden or unanticipated risk that impacts either a country’s cooperative stance, the ability of non-state actors to globalize, or both. Examples include sudden uprisings, invasions, or the aftermath of natural disasters.”

Question 35

Which statement about the Ricardian model of trade is most accurate? The model:

allows for a redistribution of income through trade.
incorporates the benefit of technology in labor productivity.
predicts that a country with abundant labor resources relative to capital will likely export labor-intensive goods and import capital-intensive goods.

Answer 35

B is correct. In the Ricardian model of trade, labor is the only input and the benefit of technology is reflected in labor productivity.