Kaplan Mock 4 - Part 1

Question 1

Log- Lin Model

ln Y = b0 + B1*X

Answer 1

(Dep) “-“ (Indep) “model”

Log will be relative change.
Lin will be absolute change.

Question 2

Accrual basis

In accrual accounting, the matching principle states that:

A)
an entity should recognize revenues only when received and expenses only when they are paid.
Incorrect Answer
B)
transactions and events producing cash flows are allocated only to time periods in which the cash flows occur.
Incorrect Answer
C)
expenses incurred to generate revenue are recognized in the same time period as the revenue.
Correct Answer
Explanation
The matching principle holds that expenses should be accounted for in the same performance measurement period as the revenue they generate. (Module 18.3, LOS 18.d)

Answer 2

Revenue Recognition: Revenue is recognized when it is earned (not paid), typically when goods are delivered or services are performed, even if the payment is yet to be received.

Expense Recognition: Expenses are recognized when they are incurred, meaning when goods or services are received or consumed, rather than when they are paid.

Matching Principle: This principle ensures that expenses are matched with the revenue they help generate. For example, if a company makes a sale in one accounting period but delivers the product and incurs related costs in the next period, the expenses are recognized in the period of the sale.

Question 3

33 Listed equity securities held as assets that do not convey significant influence in the investee company must be reported at fair value through profit and loss under:

A)
IFRS only.
Incorrect Answer
B)
U.S. GAAP only.
Correct Answer
C)
both IFRS and U.S. GAAP.
Incorrect Answer

Answer 3

U.S. GAAP categorizes equity investment without significant control as trading securities, reported at fair value with profit and loss reported on the income statement. Under IFRS, firms can report equity securities in this manner, but may elect at the time of purchase to report an equity security at fair value through other comprehensive income.(Module 19.6, LOS 19.e)

Question 4

The independent auditors of Shadydells, Inc., have determined that the company recorded operating leases that should have been capitalized. This is considered to be a material instance of noncompliance with applicable GAAP, but the financial statements are otherwise fairly presented. Which opinion are the auditors most likely to issue?

A)
Adverse opinion.
Incorrect Answer
B)
Qualified opinion.
Correct Answer
C)
Unqualified opinion.
Incorrect Answer

Answer 4

Explanation
Auditors issue a qualified opinion when there is a material instance of noncompliance with applicable accounting standards (cases of an exception).

An unqualified opinion means the auditors believe there is reasonable assurance that the financial statements are free of error and in compliance with applicable accounting standards. An adverse opinion is only issued when the auditors believe the financial statements as a whole are not fairly presented. (Module 16.2, LOS 16.d)

Question 5

37
Indirect method for CFO

Answer 5

1. adjustment for noncash and nonoperating items (depreciation, gain/loss from sale of assets)
2. adjustment for changes in working capital items

“Dividends paid are CFF, not CFO. “

Question 6

The J-curve, in the context of trade between two countries, refers to the fact that when the domestic country has a trade deficit:

A)
appreciation of the domestic currency initially leads to a decrease in the trade deficit but will increase the trade deficit in the long term.
Incorrect Answer
B)
an increase in domestic inflation will initially increase the trade deficit but will decrease the trade deficit in the long term.
Incorrect Answer
C)
appreciation of the foreign currency will initially increase the trade deficit but will decrease the trade deficit in the long term.
Correct Answer

Answer 6

Thinking about fixed contract for J curve

The J-curve effect refers to a plot of the trade deficit over time when the domestic currency depreciates (the foreign currency appreciates). The trade deficit gets worse initially but then improves over time, either because export and import demand are more elastic in the long run or because existing contracts for future delivery are fixed in foreign currency terms in the short run. (Module 15.3, LOS 15.j)

Question 7

Elasticity Approach vs Absorption Approach

Answer 7

Elasticity Approach: considers the impact of import and export based on the change of exchange rate; J curve

Absorption Approach: consider the elasticity approach and the capital flow (capital account). The domestic absorption must fall for the balance of trade to improve in response to a currency depreciation.

BT = Y − E
where:
Y = domestic production of goods and services or national income
E = domestic absorption of goods and services, which is total expenditure
BT = balance of trade

Question 8

Which of the following organizations is the most focused on promoting economic growth and reducing poverty by offering both monetary and technical assistance?

A)
World Bank.
Correct Answer
B)
World Trade Organization.
Incorrect Answer
C)
International Monetary Fund.
Incorrect Answer
Explanation
Promoting economic growth and reducing world poverty are among the primary goals of the World Bank. The IMF primarily promotes the growth of international trade, supports exchange rate stability, and provides a forum for cooperation on monetary problems internationally. The WTO has a primary focus on reaching trade agreements and settling trade disputes. (Module 14.2, LOS 14.j)

Question 9

The quantity theory of money states that in a full employment economy, any increase in the supply of money in excess of the rate of growth of real GDP will lead to a proportional increase in:

A)
the price level.
Correct Answer
B)
velocity.
Incorrect Answer
C)
real GDP.
Incorrect Answer

The quantity theory of money hypothesizes that a change in the money supply, at full employment, will cause a proportional change in the price level because velocity and real output will be unaffected. According to the equation of exchange, MV = PY, output of goods and services produced, Y, at full employment cannot change, so the price level, P, must increase. (Module 12.1, LOS 12.c)

Answer 9

money supply × velocity = price ​× real output (MV = PY)

Price multiplied by real output is total spending so that velocity is the average number of times per year each unit of money is used to buy goods or services. The equation of exchange must hold with velocity defined in this way.

Monetarists believe that velocity and the real output of the economy change only slowly. Assuming that velocity and real output remain constant, any increase in the money supply will lead to a proportionate increase in the price level.

Question 10

Question 41
Roy’s Safety-First criterion

Answer 10

The optimal portfolio is the one with the greatest SFRatio as it has the lowest probability of a return below the minimum.

Question 11

A lessor will recognize a lease receivable asset if the lease is classified as:

A)
an operating lease. (operating expense, it will not mention the receivable asset)
Incorrect Answer
B)
a finance lease.
Correct Answer
C)
either an operating or a finance lease.
Incorrect Answer

Answer 11

With a finance lease, the lessor will recognize a lease receivable asset and amortize it over the lease term.

With an operating lease, the lessor retains the leased asset on its balance sheet and records depreciation expense over its useful life.(Module 25.4, LOS 25.h)

Question 12

Come back question 42

Question 13

An unbiased estimator has an expected value equal to the true value of the population parameter. A consistent estimator is more accurate the greater the sample size. An efficient estimator has the sampling distribution that is less than that of any other unbiased estimator. (Module 5.1, LOS 5.f)

Question 14

Which of the following types of items are least likely included in other comprehensive income?

A)
Losses under the revaluation model.
Incorrect Answer
B)
Unrealized gains on equity securities.
Incorrect Answer
C)
Realized gains on securities classified as available-for-sale.
Correct Answer
Explanation
Realized gains on investment securities are reported on the income statement under both IFRS and U.S. GAAP. The other two types of gains may be reported as other comprehensive income under certain circumstances.(Module 18.5, LOS 18.k)

Answer 14

Comprehensive income is a more inclusive measure that includes all changes in equity except for owner contributions and distributions.

Foreign currency translation gains and losses.
Adjustments for minimum pension liability.
Unrealized gains and losses from cash flow hedging derivatives.
Unrealized gains and losses from available-for-sale securities.

Question 15

while the abnormal returns are highly significant statistically, they may not be economically meaningful.

Answer 15

There are many reasons that a statistically significant result may not be economically significant (meaningful). Besides transactions costs, we must consider the risk of the strategy as well. For example, although the mean abnormal return to the strategy over the 5-year sample period is greater than transactions costs, abnormal returns for various sub-periods may be highly variable. In this case the risk of the strategy return from month to month or quarter to quarter may be too great to make employing the strategy in client accounts economically attractive. (Module 6.1, LOS 6.d)

Assume we have rejected the null in favor of the alternative hypothesis that the returns to the strategy are greater than zero (positive). This does not necessarily mean that investing in that strategy will result in economically meaningful positive returns. Several factors must be considered.

• One important consideration is transactions costs.
• Taxes are another factor that may make a seemingly attractive strategy a poor one in practice.
• Even if the mean return is greater than 0, there could be a lot of variation of return throughout the life of the asset.

Question 16

During a period when net income is unexpectedly weak, managers who attempt to smooth earnings are most likely to:

A)
capitalize an expense.
Correct Answer
B)
decrease the estimated lives of assets.
Incorrect Answer
C)
classify a nonrecurring gain as recurring income.
Incorrect Answer
Explanation
Management may attempt to increase reported earnings in the current period by capitalizing an expense. Classifying a nonrecurring gain as recurring income would not increase net income because it already includes nonrecurring gains. Decreasing the estimated lives of assets would increase depreciation expense and decrease income in the current period. (Module 26.2, LOS 26.h)

Question 17

To manipulate the earnings, management can:

• Change the shipping point to recognize the revenue earlier (free on board)
• Delay recognition of revenue (channel stuffing)
• Bill and hold transactions. Customer will buy the goods and receive the invoice. However, they will ask the supplier to keep the goods in their inventory. They will recognize the revenue for goods that are in the supplier’s inventory.
• Increasing the valuation allowance will increase the income tax expense, which will reduce the net income for the current period
• delaying recognition of an impairment charge for goodwill, the company can the earning high
• capitalizing expenses will increase the net income for current period

Question 18

Which of the following pairs of general categories are least likely to be considered in the formulas used by credit rating agencies to determine the capacity of a borrower to repay a debt?

A)
Operational efficiency; leverage.
Incorrect Answer
B)
Margin stability; availability of collateral.
Correct Answer
C)
Leverage; scale and diversification.
Incorrect Answer

Answer 18

The four general categories are: (1) scale and diversification, (2) operational efficiency, (3) margin stability, and (4) leverage. Larger companies and those with more different product lines and greater geographic diversification are better credit risks. High operating efficiency is indicative of a better credit risk. Stable profit margins indicate a higher probability of repayment and thus, a better credit risk. Firms with greater earnings in relation to their debt level are better credit risks. While the availability of collateral certainly reduces lender risk, it is not one of the general categories used by credit rating agencies to determine capacity to repay. Specifically, they would consider (1) several specific accounting ratios and (2) business characteristics. The availability of collateral falls into neither category. (Module 27.2, LOS 27.c)

credit analysts have spoken of the “three Cs,” “four Cs,” or even the “five Cs” of credit analysis. One version of the three Cs includes: Character, Collateral, and Capacity to repay.

Question 19

A monopolist is most likely to:

A)
maximize the average profit per unit sold.
Incorrect Answer
B)
charge the highest price for which it can sell its product.
Incorrect Answer
C)
produce where marginal revenue equals marginal cost.
Correct Answer

Answer 19

Like all price searchers, monopolists will expand output until marginal revenue equals marginal cost. Monopolists do not charge the highest possible price which would be the price resulting in only one sale. A monopolist seeks to maximize profit, not price. (Module 9.4, LOS 9.d)

Question 20

Under U.S. GAAP, which of the following statements about the financial statement effects of issuing bonds is least accurate?

A)
Issuance of debt has no effect on cash flow from operations.
Incorrect Answer
B)
Periodic interest payments decrease cash flow from operations by the amount of interest paid.
Incorrect Answer
C)
Payment of debt at maturity decreases cash flow from operations by the face value of the debt.
Correct Answer

Answer 20

Issuing and payment of debt is CFF.

Issuing debt results in a cash inflow from financing. Payment of debt at maturity has no effect on cash flow from operations but decreases cash flow from financing by the face value of the debt. (Module 25.2, LOS 25.b)

Question 21

Nonparametric tests either do not consider a particular population parameter or have few assumptions about the population that is sampled. Nonparametric tests are used when there is concern about quantities other than the parameters of a distribution or when the assumptions of parametric tests can’t be supported. They are also used when the data are not suitable for parametric tests (e.g., ranked observations).

Answer 21

Situations where a nonparametric test is called for are the following:

The assumptions about the distribution of the random variable that support a parametric test are not met. An example would be a hypothesis test of the mean value for a variable that comes from a distribution that is not normal and is of small size so that neither the t-test nor the z-test is appropriate.
When data are ranks (an ordinal measurement scale) rather than values.
The hypothesis does not involve the parameters of the distribution, such as testing whether a variable is normally distributed. We can use a nonparametric test, called a runs test, to determine whether data are random. A runs test provides an estimate of the probability that a series of changes (e.g., +, +, –, –, +, –,….) are random.

Question 22

Which of the following tests would generally be considered a nonparametric test?

A)
Test of whether a sample is random.
Correct Answer
B)
Large sample test of the value of a population mean.
Incorrect Answer
C)
Value of the variance of a normal population.
Incorrect Answer
Explanation
Nonparametric tests can be used in a variety of instances where the assumptions required for parametric tests cannot be sustained. A runs test can be used to test for the randomness of a sample. Both of the other tests are parametric because they test the value of a parameter of the underlying distribution. (Module 6.4, LOS 6.k)

Related Material

Question 23

Long-run aggregate supply is least likely to be affected by changes in the:

A)
prices of raw materials inputs.
Correct Answer
B)
quantity of labor in the economy.
Incorrect Answer
C)
level of technology.
Incorrect Answer
Explanation
Long-run aggregate supply is related to the level of technology and the available quantities of labor and capital. If the prices of productive inputs increase, short-run aggregate supply decreases (the SRAS curve shifts to the left), but long-run aggregate supply (potential real GDP) is unaffected. (Module 10.3, LOS 10.m)

Answer 23

growth in potential GDP = growth in technology + WL(growth in labor) + WC(growth in capital)

price of raw materials input affect the short term supply but not the long term supply

Question 24

Come back to question 61

Question 25

Question 66 - t test

Question 26

Which of the following statements regarding the significance level of a hypothesis test is most accurate?

A)
Given a significance level of 5%, a test will reject a true null hypothesis 5% of the time.
Correct Answer
B)
If the significance level of a test is 5%, it will yield the correct decision about the null hypothesis 95% of the time.
Incorrect Answer
C)
If the significance level of a test is 95%, it will yield the correct decision about the null hypothesis 95% of the time.
Incorrect Answer

The significance level of a test is the probability that a true null hypothesis will be rejected by chance because the test statistic is from a sample and may take on a value that is outside the range of critical values because of sampling error. Choice B is incorrect because the probability of making a correct decision also must account for the probability of failing to reject a false null hypothesis. (Module 6.1, LOS 6.c)

Answer 26

The significance level is the probability of making a Type I error (rejecting the null when it is true) and is designated by the Greek letter alpha (α).

While the significance level of a test is the probability of rejecting the null hypothesis when it is true, the power of a test is the probability of correctly rejecting the null hypothesis when it is false.

Question 27

Numerical data, or quantitative data, are values that can be counted or measured. Numerical data may be discrete or continuous. Discrete data are countable, such as the months, days, or hours in a year. Continuous data can take any fractional value (e.g., the annual percentage return on an investment).

Categorical data or qualitative data, consist of labels that can be used to classify a set of data into groups. Categorical data may be nominal or ordinal.

Answer 27

Nominal data are labels that cannot be placed in order logically. For example, fixed-income mutual funds may be classified as corporate bond funds, municipal bond funds, international bond funds, and so on. Even if we assign numbers to the categories (such as the number 1 to a corporate bond fund, the number 2 to a municipal bond fund, and so on), the numbers are arbitrary.

By contrast, ordinal data can be ranked in a logical order.

Question 28

Question 72 - Diluted EPS

Question 29

Degen, Inc., owns a trademark which it originally valued at €15 million on its balance sheet but currently values at €10 million. In the country where Degen is incorporated, trademarks are protected by law for as long as their owner remains a going concern. Degen has most likely:

A)
developed its trademark at a cost of €15 million.
Incorrect Answer
B)
recorded amortization expense of €5 million on its trademark.
Incorrect Answer
C)
recognized €5 million of impairment charges on its trademark.
Correct Answer

Answer 29

The trademark is an intangible asset with an indefinite life, and its cost is not amortized. The decrease in the trademark’s balance sheet value must be the result of impairment. For the intangible asset to appear on the balance sheet, Degen must have purchased the trademark. If Degen had developed the trademark internally, it would have expensed the cost rather than capitalizing it to the balance sheet. (Module 23.3, LOS 23.j)

Question 30

Assume that one year ago, the exchange rate between the Japanese yen and the euro was 100 JPY/EUR, and the exchange rate between the Japanese yen and the U.S. dollar was 80 JPY/USD. Current exchange rates are 104.2 JPY/EUR and 76.6 JPY/USD. Which of the following statements is most accurate?

A)
The USD has depreciated relative to the EUR.
Correct Answer
B)
The JPY has depreciated 4.2% relative to the EUR.
Incorrect Answer
C)
The current U.S. dollar to euro exchange rate is approximately 1.25 USD/EUR.
Incorrect Answer

Answer 30

For answer B, while it is correct to say that the EUR has appreciated 4.2% relative to the JPY (104.2 / 100 – 1) = 4.2%, it is not correct to say that the JPY has depreciated by the same percentage. To calculate the percentage change in the JPY relative to the EUR, we need to invert the quotes. One year ago, the quote was 0.0100 EUR/JPY and now the quote is 0.0096 EUR/JPY. (0.0096 / 0.0100 – 1) = 0.0403 or 4.0% depreciation in the JPY relative to the EUR.

Question 31

An analyst gathered the following information about a company:

Cash flow from operations $800
Purchase of plant and equipment 40
Sale of land 30
Interest expense 80
Depreciation and amortization 100
The company has a tax rate of 35% and prepares its financial statements under U.S. GAAP.
The company’s free cash flow to the firm (FCFF) is closest to:

FCFF = Cash flow from operations + interest expense net of tax − net capital expenditures

FCFF = $800 + 80(1 − 0.35) − 40 + 30 = $842

Depreciation and amortization do not have to be added when calculating FCFF from CFO. They are added when calculating FCFF from net income. (Module 20.4, LOS 20.i)

Answer 31

FCFF = CFO + [Int × (1 − tax rate)] − FCInv

FCFE = CFO + net borrowing − FCInv

CFO = cash flow from operations
Int = cash interest paid
FCInv = fixed capital investment (net capital expenditures)
net borrowing = debt issued – debt repaid

Question 32

F-test question 77

Question 33

Question 78
Harding Corp. has a permanently impaired asset. The difference between its carrying value and the present value of its expected cash flows should be written down immediately and:

A)
reported as an operating loss.
Correct Answer
B)
charged directly against retained earnings.
Incorrect Answer
C)
reported as a non-operating loss in other comprehensive income.
Incorrect Answer
Explanation
Impairment writedowns are reported losses “above the line” and are included in income from continuing operations. (Module 18.3, LOS 18.e)

Question 34

If market interest rates have changed materially since a firm issued a bond, and the firm uses the effective interest rate method, how is a change in the market value of the firm’s debt most likely to be reported in the firm’s financial statements?

A)
The gain or loss in market value must be calculated and disclosed in the footnotes to the financial statements.
Incorrect Answer
B)
Net income and equity are unaffected, but the change may be discussed in management’s commentary.
Correct Answer
C)
Net income is unaffected, but the change in market value is recorded in other comprehensive income.
Incorrect Answer
Explanation
Material changes in the firm’s cost of debt capital should be included in the Management Discussion and Analysis section of the financial statements. If the firm does not use fair value reporting of debt obligations, net income and shareholders’ equity are not affected by changes in the market value of the firm’s debt, and disclosing its gain or loss in market value is not required. (Module 25.3, LOS 25.e)

Question 35

If the probability of event J multiplied by the probability of event K is not equal to the joint probability of events J and K, then events J and K are most likely:

A)
dependent events.
Correct Answer
B)
independent events.
Incorrect Answer
C)
mutually exclusive events.
Incorrect Answer
Explanation
Events J and K are dependent. By the multiplication rule, joint probability P(JK) = P(J|K) × P(K), or P(JK) = P(K|J) × P(J). Events are independent if P(J|K) = P(J) and P(K|J) = P(K). This implies that for independent events, P(JK) = P(J) × P(K). If this condition is not met, events J and K are dependent. If events J and K are mutually exclusive, their joint probability is zero. The information given is consistent with this but not sufficient to conclude that this is the case. (Module 3.2, LOS 3.f)

Question 36

The direct method of reporting operating cash flow:

A)
is preferred by analysts and commercial lenders.
Correct Answer
B)
is the most frequently used method under both U.S. GAAP and IFRS.
Incorrect Answer
C)
shows the reasons for differences between net income and operating cash flows.
Incorrect Answer
Explanation
The direct method is preferred by analysts and commercial lenders because it gives information about specific types of operating cash flows that is useful in determining a company’s future financing needs and ability to repay debt. The indirect method shows the reasons for differences between net income and operating cash flows. (Module 20.1, LOS 20.e)

Question 37

The CFA Institute Code of Ethics most likely requires members and candidates to:

A)
not engage in activity which compromises the integrity of CFA Institute.
Incorrect Answer
B)
stay informed on applicable laws and regulations that pertain to their respective areas of business.
Incorrect Answer
C)
act with competence, integrity, and in ethical manner when dealing with the public, clients, employers, employees, and other market participants.
Correct Answer

Answer 37

The first requirement of the Code of Ethics is that members and candidates “act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.”

Knowing the applicable laws and regulations is required by Standard I(A) Knowledge of the Law. Standard VII(A) Conduct as Participants in CFA Institute Programs requires members and candidates not to compromise the integrity of CFA Institute. (Module 71.9, LOS 71.a, 71.c, 71.b)

Question 38

Sanctions that may be imposed on members by CFA Institute include:

A)
public censure, suspension of membership, and fines.
Incorrect Answer
B)
suspension of membership, revocation of CFA charter, and fines. (CFA don’t charge fines)
Incorrect Answer
C)
public censure, suspension of membership, and revocation of CFA charter.
Correct Answer

Answer 38

If a Professional Conduct Program inquiry finds that a member has violated the Code and Standards, CFA Institute may impose sanctions, which include public censure, suspension of membership in CFA Institute and use of the CFA designation, and revocation of a member’s CFA charter.

CFA Institute does not impose fines. ( Module 70.1, LOS 70.a)

Question 39

Mary Walters, CFA, is a bank trust officer who has entered into a referral agreement with Bob Sear, a tax attorney. Sear has told Walters that he will do her tax work in return for referrals. According to the CFA Institute Code and Standards, Walters must disclose:

A)
only the fact that she compensated for referrals, to any clients or prospects she refers to Sear.
Incorrect Answer
B)
only the fact that she is compensated for referrals, to her employer and any clients or prospects she refers to Sear.
Incorrect Answer
C)
the fact that she is compensated for the referrals and the nature of the compensation she is to receive, to her employer and any clients or prospects she refers to Sear.
Correct Answer

Answer 39

Standard VI(C) Referral Fees requires members and candidates to disclose any compensation received for referrals and the nature of the compensation, to their employers and to any clients or prospects they refer to others with the expectation of compensation in any form. (Module 71.8, LOS 71.a, 71.c, 71.b)

Question 40

When a member or candidate knows that a client and coworker are violating regulatory rules and local law, the member or candidate is:

A)
not required to report any of the violations to authorities.
Correct Answer
B)
required to report violations by the coworker but not the client.
Incorrect Answer
C)
required to report the violations of the law and of the regulatory rules to the appropriate authority.
Incorrect Answer

Answer 40

The Standards strongly encourage, but do not require, members and candidates to report violations of relevant regulatory rules and laws. (Module 73.1, LOS 73.b)

Question 41

Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

Answer 41

The key point here is that if there is the intent to mislead, then the Standard is violated.

Question 42

To be compliant with GIPS, a firm’s composites must comprise all:

A)
fee-paying accounts.
Incorrect Answer
B)
discretionary accounts.
Incorrect Answer
C)
discretionary accounts that are fee-paying.
Correct Answer

Answer 42

Each discretionary fee-paying account must be included in at least one composite. (Module 72.1, LOS 72.c)

A composite is a grouping of individual discretionary portfolios representing a similar investment strategy, objective, or mandate. Examples of possible composites are large capitalization stocks, investment-grade domestic bonds, and accounts managed to match the performance of a specific securities index.

A composite, such as international equities, must include all fee-paying, discretionary portfolios (current and past) that the firm has managed in accordance with a particular strategy.