CFA Level 1

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Question 1 of 1

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687114

600

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If a company recognizes revenue faster than justified, which of the following describes the likely effects on accounts receivable and retained earnings?

Select the correct answer(s).

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Explanation

Recognizing revenue faster than justified normally overstates accounts receivable (revenue is earned but payment has not yet been received) and overstates retained earnings (because revenue through its contribution to net income ends up in retained earnings). Choice “a” is incorrect. While recognizing revenue faster than justified would likely overstate accounts receivable, retained earnings would be overstated (rather than understated) due to the increase in net income from the recognized revenues. Choice “c” is incorrect. Accounts receivable would likely be overstated (rather than understated) from recognizing revenue early.

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If a company recognizes revenue earlier than justified, which of the following BEST DESCRIBES the likely impact on accounts receivable and inventory?

Select the correct answer(s).

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Explanation

Receivables will increase assuming the recognized revenue is on credit. When the revenue is recognized, cost of goods sold will increase and inventories will decrease. Choice “a” is incorrect. While recognizing revenue faster than justified would likely overstate accounts receivable, inventory would be understated due to the increase in cost of goods sold. Choice “c” is incorrect. Accounts receivable would likely be overstated (rather than understated) from recognizing revenue early.

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Which of the following statements MOST ACCURATELY reflects the effects of the percentage–of–completion method for recognizing income on long–term projects versus the use of the completed contract method?

Select the correct answer(s).

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Explanation

Revenues and expenses (and thus earnings) are recognized periodically throughout the life of a project using the percentage-of-completion method while revenues and expenses are recognized only at the end of a project using the completed contract method. This periodic recognition of revenues, expenses, and earnings tends to produce smoother earnings. Choice “a” is incorrect. The debt-to-equity ratio will generally be lower, not higher, if the percentage-of-completion method is used as a result of the profits being credited to retained earnings (part of equity) each year. Choice “c” is incorrect. The completed contract method typically generates smaller asset balances than the percentage-of-completion method, as only costs are capitalized as work-in-process. Under the percentage-of-completion method, costs plus profits are capitalized as work-in-progress.

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Upon reviewing a firm's most recent financial statements an analyst is LEAST LIKELY to use the:

Select the correct answer(s).

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Explanation

The balance sheet, not the income statement, would be the appropriate financial statement for the analyst to review in order to evaluate the firm’s debts (liabilities) and holdings (assets). Company balance sheets will often provide at least two years of data-the current year and the prior year. Choice “a” is incorrect. There are various profit margins that analysts use to evaluate a firm. Most notable are gross profit margin, operating profit margin, and net profit margin. All three calculations use data derived from the income statement. Choice “b” is incorrect. An analyst can take the book value of the firm’s common stock (roughly calculated as Assets - Liabilities - Preferred Stock) and divide that by the number of outstanding common shares to derive a book value per share. A comparison of this price to the current stock (market) price is one indicator of relative value. The book value calculation is made based on data found on the balance sheet.

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The financial statement which summarizes the operating, investing, and financing activities of an entity over a specific period of time is the:

Select the correct answer(s).

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Explanation

The statement of cash flows reflects the operating, investing and financial cash inflows/outflows of a firm over a period of time. Choice “a” is incorrect. The balance sheet does not summarize the operating cash flows over a period of time, but the financial position of a company at a point in time. Choice “b” is incorrect. The income statement summarizes the operating performance (profitability) of an entity over a period of time.

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Which of the following best reflects a primary use of cash flow information when analyzing a company?

Select the correct answer(s).

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Explanation

The financing activities section of the statement of cash flows indicates management decisions regarding the use of debt and equity. Choice “a” is incorrect. The statement of cash flows does not provide a detailed breakdown of the components of net income, which is a function of the income statement. Choice “c” is incorrect. An analyst can determine if growth was financed through internal cash flows by reviewing the operating and investing activities sections of the statement of cash flows. However, debt capacity is usually evaluated using a combination of balance sheet and income statement ratios.

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Which of the following financial statements is measured and reported at a specific point in time?

Select the correct answer(s).

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Explanation

The balance sheet reports a snapshot of asset, liability, and equity accounts at a specific point in time. Choice “a” is incorrect. The statement of cash flows reports activity over an accounting period and not at a specific point in time. Only the beginning and ending cash amounts are at a specific point in time. Choice “b” is incorrect. The income statement reports income and expenses over an accounting period and not at a specific point in time.

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Which of the following statements regarding the income statement under U.S. GAAP is MOST ACCURATE?

Select the correct answer(s).

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Explanation

Net income generally does not reflect sustainable income. Choice “a” is incorrect. Under the accrual method of accounting, revenues and expenses are often reported in periods other than those in which the cash is received and paid. Choice “c” is incorrect. Revenues and expenses are often based on historical information.

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Which of the following financial statements provides a snapshot of the financial condition of a firm at a particular point in time?

Select the correct answer(s).

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Explanation

The balance sheet is a snapshot of the firm’s financial condition on a particular date. Choices “b” and “c” are incorrect. Each of these statements reflects activity over a period of time rather than showing the financial condition of a firm on a specific date.

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Which of the following financial statements is a summary of the operating performance of a firm over a period of time?

Select the correct answer(s).

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Explanation

The income statement provides a summary of the firm’s operating performance (profitability) over a period of time. Choice “a” is incorrect. The balance sheet reflects the financial condition of a firm at a point in time. Choice “c” is incorrect. The statement of cash flows reflects the cash inflows and outflows of a firm over a period of time.

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A country entering into a free trade agreement will likely see benefits from:

Select the correct answer(s).

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Explanation

Goods being exported will likely see higher prices as demand for the products increases from the new trading partners. These higher prices increase the profits of the country’s most competitive firms, allowing them to expand and further help the country. Choice “b” is incorrect. Import prices would be expected to fall as a country enters a free trade agreement because of lower tariffs and/or quotas. Choice “c” is incorrect. One of the drawbacks of free trade is that it often leads to greater income inequality. This happens because non-competitive industries are hurt from the new foreign competition.

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A developed country with a skilled workforce is entering into a free trade agreement with a developing country with an unskilled workforce. Which company is MOST LIKELY to benefit in the near term from its home country entering a free trade area?

Select the correct answer(s).

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Explanation

Given the skill advantage of the developed country, companies that capitalize on its skilled workforce are likely to benefit most from trade with the developing country. This includes companies producing higher value added products, like the precision drill bit manufacturer. Choice “a” is incorrect. The developed country’s low cost producers are likely to face increased competition from the lower wages in the developing country. This will hurt producers of low value added products like axe blades. Choice “c” is incorrect. Monopoly producers face challenges with free trade because they lose their monopoly positions. Monopolies often are less efficient than other companies because they lack competition once they achieve their monopolistic status.

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Evergreen Advisors is an activist fund considering investing in a number of attractive homebuilders. Evergreen intends to invest the minimum capital that would allow it to get at least one seat representation on the board of each company. All else being equal, Evergreen would prefer to invest in companies with:

Select the correct answer(s).

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Explanation

Cumulative voting allows minority shareholders to apply all of their votes to one director candidate, increasing the chances of obtaining board representation for a given number of voting rights.

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Preferred stock is similar to debt securities because:

Select the correct answer(s).

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Explanation

A company can declare a dividend on common stock only if all current and accrued dividends on preferred stock are paid first; similarly, upon liquidation, preference shareholders are paid before common shareholders – hence the term "preference." Choice “a” is incorrect. Companies can decide whether dividends are paid in a given period and can declare a zero dividend on both common and preferred stock, without violating a contract. Choice “c” is incorrect. As an equity security, preferred stock pays dividends with after-tax dollars and therefore does not provide a tax shield to the issuing corporation.

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An example of a trial that can be modeled as binomial distribution is the drawing of a:

Select the correct answer(s).

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Explanation

Drawing from a deck of cards with replacement results in a binomial distribution, in that the probability of success (1/52) remains constant for each trial and the trials are independent. Each trial results in one of only two outcomes: the specified card is drawn (success) or it is not (failure). When the drawn card is replaced in the deck, the subsequent trial is independent of the previous trial. Choice “b” is incorrect. Drawing cards without replacement involves dependent events which violates the requirement that trials in a binomial distribution be independent. Choice “c” is incorrect. Drawing a particular suit from a deck of cards involves four possible outcomes (spades, hearts, diamonds or clubs) and does not adhere to the limit of only two possible outcomes required of a binomial distribution.

CFA Level 1

Question 1 of 1

Time Left

If a company recognizes revenue faster than justified, which of the following describes the likely effects on accounts receivable and retained earnings?

Select the correct answer(s).

(0/0)

Explanation

If a company recognizes revenue earlier than justified, which of the following BEST DESCRIBES the likely impact on accounts receivable and inventory?

Select the correct answer(s).

(0/0)

Explanation

Which of the following statements MOST ACCURATELY reflects the effects of the percentage–of–completion method for recognizing income on long–term projects versus the use of the completed contract method?

Select the correct answer(s).

(0/0)

Explanation

Upon reviewing a firm's most recent financial statements an analyst is LEAST LIKELY to use the:

Select the correct answer(s).

(0/0)

Explanation

The financial statement which summarizes the operating, investing, and financing activities of an entity over a specific period of time is the:

Select the correct answer(s).

(0/0)

Explanation

Which of the following best reflects a primary use of cash flow information when analyzing a company?

Select the correct answer(s).

(0/0)

Explanation

Which of the following financial statements is measured and reported at a specific point in time?

Select the correct answer(s).

(0/0)

Explanation

Which of the following statements regarding the income statement under U.S. GAAP is MOST ACCURATE?

Select the correct answer(s).

(0/0)

Explanation

Which of the following financial statements provides a snapshot of the financial condition of a firm at a particular point in time?

Select the correct answer(s).

(0/0)

Explanation

Which of the following financial statements is a summary of the operating performance of a firm over a period of time?

Select the correct answer(s).

(0/0)

Explanation

A country entering into a free trade agreement will likely see benefits from:

Select the correct answer(s).

(0/0)

Explanation

A developed country with a skilled workforce is entering into a free trade agreement with a developing country with an unskilled workforce. Which company is MOST LIKELY to benefit in the near term from its home country entering a free trade area?

Select the correct answer(s).

(0/0)

Explanation

Select the correct answer(s).

(0/0)

Explanation

Preferred stock is similar to debt securities because:

Select the correct answer(s).

(0/0)

Explanation

An example of a trial that can be modeled as binomial distribution is the drawing of a:

Select the correct answer(s).

(0/0)

Explanation

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