CFA( Chartered Financial Analyst )Level I Mock Exam
||2023/2024 Test Bank||Questions & Answers
Information about the coupon rates on the various long-term fixed-rate debt issues of a
company can most likely be found in the:
A notes to the financial statements.
B non-current liabilities section of the balance sheet.
C Management Discussion and Analysis (MD&A). - ANSWERS A is correct. Information
about the coupon rates on the various long-term fixed-rate debt issues can usually be
found in the notes to the financial statements. The MD&A is more likely to discuss
interest rate trends and/or current financing costs but not specific information on
individual debt issues.
A company acquires some new depreciable assets. It uses straight-line deprecation for
all of its assets. Which of the following combinations of estimated residual values and
useful lives is most likely to produce the highest net profit margin? Estimated residual
values should be:
high with long average lives.
low with long average lives.
high with short average lives. - ANSWERS A is correct. A high residual value estimate
reduces the depreciable base and thus depreciation expense. Long average lives
reduce the annual depreciation expense for any given depreciable base. The
combination of the two would result in the lowest depreciation expense, which would
lead to the highest net income and profit margins.
A company using the last-in, first-out (LIFO) inventory method reports a year-end LIFO
reserve of $85,000, which is $20,000 lower than the prior year. If the company had used
first-in, first-out (FIFO) instead of LIFO in that year, its financial statements would most
likely have reported:
a higher cost of goods sold (COGS) but a lower inventory balance.
both a higher cost of goods sold (COGS) and a higher inventory balance.
a lower cost of goods sold (COGS) but a higher inventory balance. - ANSWERS B is
correct.
FIFO COGS = LIFO COGS − Change in LIFO reserve The negative change in the LIFO
reserve would increase the COGS under FIFO compared with LIFO.
FIFO inventory = LIFO inventory + LIFO reserve The LIFO reserve has a positive
balance so that FIFO inventory would be higher than LIFO inventory.
, The year-end balances in a company's last-in, first-out (LIFO) reserve are $56.8 million
as reported in the company's financial statements for both 2013 and 2014. For 2014,
the measure that will most likely be the same regardless of whether the company uses
the LIFO or the first-in, first-out (FIFO) inventory method is the:
gross profit margin.
amount of working capital.
inventory turnover. - ANSWERS A is correct.
The LIFO reserve did not change from 2013 to 2014. With no change in the LIFO
reserve, cost of goods sold will be the same under both methods. Sales are always the
same for both methods, so gross profit margin will be the same for 2014. The FIFO
inventory will be higher because the LIFO inventory and LIFO reserve are added to
compute FIFO inventory. Because the inventory balances would differ under FIFO, both
inventory turnover and the amount of working capital would also differ under FIFO.
A company uses the straight-line method to depreciate its assets. One of its assets is
accounted for under the revaluation model. At the end of Year 1, a revaluation gain is
recorded for this asset in other comprehensive income. If there is no further revaluation
in Year 2, what is the most appropriate depreciable base for the asset in Year 2?
No depreciation expense will be recorded under the revaluation model
The asset's value including the revaluation gain
The asset's original cost - ANSWERS B is correct. The revaluation model essentially
resets the asset's carrying value to fair value. Depreciation is then calculated based on
the new carrying value, which would include the revaluation gain.
A is incorrect because this would be correct under a fair value approach, which is
allowed for investment property. No depreciation is recorded under this approach.
C is incorrect because this would be correct under the cost approach.
Q. When constructing an asset for sale, directly related borrowing costs are most likely:
expensed as incurred.
capitalized as part of inventory.
capitalized as part of property, plant, and equipment. - ANSWERS B is correct. When a
company constructs an asset, borrowing costs incurred directly related to the
construction are generally capitalized. If the asset is constructed for sale, the borrowing
costs are classified as inventory.
BAURU, S.A., a Brazilian corporation, borrows capital from a local bank to finance the
construction of its manufacturing plant. The loan has the following conditions:
Borrowing date 1 January 2009
Amount borrowed 500 million Brazilian real (BRL)
Annual interest rate 14 percent
Term of the loan 3 years
,Payment method Annual payment of interest only. Principal amortization is due at the
end of the loan term.
Q. The construction of the plant takes two years, during which time BAURU earned BRL
10 million by temporarily investing the loan proceeds. Which of the following is the
amount of interest related to the plant construction (in BRL million) that can be
capitalized in BAURU's balance sheet?
130.
140.
210. - ANSWERS A is correct. Borrowing costs can be capitalized under IFRS until the
tangible asset is ready for use. Also, under IFRS, income earned on temporarily
investing the borrowed monies decreases the amount of borrowing costs eligible for
capitalization. Therefore, Total capitalized interest = (500 million × 14% × 2 years) - 10
million = 130 million.
After reading the financial statements and footnotes of a company that follows IFRS, an
analyst identified the following intangible assets:
product patent expiring in 40 years;
copyright with no expiration date; and
goodwill acquired 2 years ago in a business combination.
Q. Which of these assets is an intangible asset with a finite useful life?
Product Patent Copyright Goodwill
A Yes Yes No
B Yes No No
C No Yes Yes - ANSWERS B is correct. A product patent with a defined expiration date
is an intangible asset with a finite useful life. A copyright with no expiration date is an
intangible asset with an indefinite useful life. Goodwill is no longer considered an
intangible asset under IFRS and is considered to have an indefinite useful life.
Q. Intangible assets with finite useful lives mostly differ from intangible assets with
infinite useful lives with respect to accounting treatment of:
revaluation.
impairment.
amortization. - ANSWERS C is correct. An intangible asset with a finite useful life is
amortized, whereas an intangible asset with an indefinite useful life is not.
Q. Costs incurred for intangible assets are generally expensed when they are:
internally developed.
individually acquired.
acquired in a business combination. - ANSWERS A is correct. The costs to internally
develop intangible assets are generally expensed when incurred.
, Q. Under US GAAP, when assets are acquired in a business combination, goodwill
most likely arises from:
contractual or legal rights.
assets that can be separated from the acquired company.
assets that are neither tangible nor identifiable intangible assets. - ANSWERS C is
correct. Under both International Financial Reporting Standards (IFRS) and US GAAP,
if an item is acquired in a business combination and cannot be recognized as a tangible
asset or identifiable intangible asset, it is recognized as goodwill. Under US GAAP,
assets arising from contractual or legal rights and assets that can be separated from the
acquired company are recognized separately from goodwill.
Q. All else equal, in the fiscal year when long-lived equipment is purchased:
depreciation expense increases.
cash from operations decreases.
net income is reduced by the amount of the purchase. - ANSWERS A is correct. In the
fiscal year when long-lived equipment is purchased, the assets on the balance sheet
increase and depreciation expense on the income statement increases because of the
new long-lived asset.
Q. A company is comparing straight-line and double-declining balance amortization
methods for a non-renewable six-year license, acquired for €600,000. The difference
between the Year 4 ending net book values using the two methods is closest to:
€81,400.
€118,600.
€200,000. - ANSWERS A is correct. As shown in the following calculations, at the end
of Year 4, the difference between the net book values calculated using straight-line
versus double-declining balance is closest to €81,400.
Net book value end of Year 4 using straight-line method = €600,000 - [4 × (€600,000/6)]
= €200,000.
Net book value end of Year 4 using double-declining balance method = €600,000 (1 -
33.33%)4 ≈ €118,600.
Q. MARU S.A. de C.V., a Mexican corporation that follows IFRS, has elected to use the
revaluation model for its property, plant, and equipment. One of MARU's machines was
purchased for 2,500,000 Mexican pesos (MXN) at the beginning of the fiscal year ended
31 March 2010. As of 31 March 2010, the machine has a fair value of MXN 3,000,000.
Should MARU show a profit for the revaluation of the machine?
Yes.
No, because this revaluation is recorded directly in equity.
