CFA Level 1 question and answers rated
A+ 2023 updated
George Hutchins, CFA, would like to perform a paired comparisons test on returns for the stocks of two
real estate investment trusts. The test statistic that Hutchins should select for the paired comparisons
test is the: - correct answer t-Stat
Effective annual yield
Money Market Yield - correct answer EAY = [(1 + HPY)^(365 / t)] − 1
rMM = HPY × (360/t);
In the short run, a perfectly competitive firm's supply curve is: - correct answer upward sloping and its
demand curve is perfectly elastic.
Which of the following most accurately describes cash flow classification under U.S. GAAP and IFRS? -
correct answer Dividends paid are a financing activity under U.S. GAAP and dividends received may be
shown as an operating or investing activity under IFRS.
U.S. GAAP requires unrealized gains and losses on available-for-sale securities to be reported: - correct
answer as other comprehensive income on the statement of changes in owners' equity. Unrealized gains
and losses on actively traded securities would be reported in the income statement.
A financial analyst should treat deferred tax liabilities (DTLs) as equity if the DTLs are: - correct answer
expected to increase each period.
The major benefit of financial reporting standards is that they: - correct answer ensure that financial
reports are usable by a wide range of audiences.
Other things equal, what impact will increasing days sales in payables have on operating cash flow? -
correct answer Higher operating cash flow.
,Service costs for a defined benefit pension plan are recognized on the income statement under: - correct
answer Both IFRS and U.S. GAAP.;
Service costs, which are the additional benefits that employees have earned during the period, are
recognized as an expense on the current period income statement under both IFRS and U.S. GAAP.
JME Construction always uses the percentage of completion method of recognizing revenue. During
2004 JME signs a contract in the amount of $10 million with the following data available:
Costs incurred to date $2,200,000
Billings to date $2,000,000
Cash collected $1,750,000
Total cost of project $8,800,000
How much gross profit should JME recognize for 2004? - correct answer stage of completion = 25%(2.2 /
8.8)
revenue to be recognized = 0.25 × 10 million = 2.5 million
gross profit = 2.5 million - 2.2 million = 300,000
(Study Session 7, Module 23.3, LOS 23.b)
A U.S. company uses the LIFO method to value its inventory for their income tax return. For its financial
statements prepared for shareholders, the company may: - correct answer only use the LIFO method.
Which of the following items for a financial services company is least likely to be considered an operating
item on the income statement? - correct answer Income tax expense.
For a financial services company, interest income, interest expense, and financing expenses are likely
considered operating activities. For both financial and nonfinancial companies, income tax expense is a
non-operating item that is reported within "income from continuing operations" as opposed to
"operating profit" as with the other answer choices. Therefore, of the three choices, income tax expense
is least likely to be considered an operating item.
, Which of the following statements regarding inflation is most accurate? - correct answer Inflation is a
persistent increase in the general price level of goods and services.
Over the last five years, in the country of Midlothian, both the labor supply and the real stock of physical
capital have increased by 20% and real GDP increased 22%. The reason that real GDP growth was greater
than input growth over the period is most likely that: - correct answer total factor productivity increased.
Any excess of real GDP growth over the rate of growth in labor and capital indicates there has been an
increase in total factor productivity.
Which of the following is least likely to be considered a stated goal of the International Accounting
Standards Board (IASB)? - correct answer The IASB has four stated goals:
Develop global accounting standards requiring transparency, comparability, and high quality in financial
statements.
Promote the use of global accounting standards.
Account for the needs of emerging markets and small firms when implementing global accounting
standards.
Achieve convergence between various national accounting standards and global accounting standards.
A company issues an annual-pay bond with a face value of $135,662, maturity of 4 years, and 7%
coupon, while market interest rates for its bonds are 8%. What is the unamortized discount at the end of
the first year? - correct answer Face value of bonds = $135,662.
Proceeds from bond sale: I/Y = 8.00%; N = 4; PMT = $135,662 × 0.07 = $9,496.34; FV = $135,662; CPT PV
= $131,169
Unamortized discount at issuance = $135,662 - $131,169 = $4,493.
First year interest expense = $131,169 × 0.08 = $10,494.
Coupon payment = $135,662 × 0.07 = $9,496.
A+ 2023 updated
George Hutchins, CFA, would like to perform a paired comparisons test on returns for the stocks of two
real estate investment trusts. The test statistic that Hutchins should select for the paired comparisons
test is the: - correct answer t-Stat
Effective annual yield
Money Market Yield - correct answer EAY = [(1 + HPY)^(365 / t)] − 1
rMM = HPY × (360/t);
In the short run, a perfectly competitive firm's supply curve is: - correct answer upward sloping and its
demand curve is perfectly elastic.
Which of the following most accurately describes cash flow classification under U.S. GAAP and IFRS? -
correct answer Dividends paid are a financing activity under U.S. GAAP and dividends received may be
shown as an operating or investing activity under IFRS.
U.S. GAAP requires unrealized gains and losses on available-for-sale securities to be reported: - correct
answer as other comprehensive income on the statement of changes in owners' equity. Unrealized gains
and losses on actively traded securities would be reported in the income statement.
A financial analyst should treat deferred tax liabilities (DTLs) as equity if the DTLs are: - correct answer
expected to increase each period.
The major benefit of financial reporting standards is that they: - correct answer ensure that financial
reports are usable by a wide range of audiences.
Other things equal, what impact will increasing days sales in payables have on operating cash flow? -
correct answer Higher operating cash flow.
,Service costs for a defined benefit pension plan are recognized on the income statement under: - correct
answer Both IFRS and U.S. GAAP.;
Service costs, which are the additional benefits that employees have earned during the period, are
recognized as an expense on the current period income statement under both IFRS and U.S. GAAP.
JME Construction always uses the percentage of completion method of recognizing revenue. During
2004 JME signs a contract in the amount of $10 million with the following data available:
Costs incurred to date $2,200,000
Billings to date $2,000,000
Cash collected $1,750,000
Total cost of project $8,800,000
How much gross profit should JME recognize for 2004? - correct answer stage of completion = 25%(2.2 /
8.8)
revenue to be recognized = 0.25 × 10 million = 2.5 million
gross profit = 2.5 million - 2.2 million = 300,000
(Study Session 7, Module 23.3, LOS 23.b)
A U.S. company uses the LIFO method to value its inventory for their income tax return. For its financial
statements prepared for shareholders, the company may: - correct answer only use the LIFO method.
Which of the following items for a financial services company is least likely to be considered an operating
item on the income statement? - correct answer Income tax expense.
For a financial services company, interest income, interest expense, and financing expenses are likely
considered operating activities. For both financial and nonfinancial companies, income tax expense is a
non-operating item that is reported within "income from continuing operations" as opposed to
"operating profit" as with the other answer choices. Therefore, of the three choices, income tax expense
is least likely to be considered an operating item.
, Which of the following statements regarding inflation is most accurate? - correct answer Inflation is a
persistent increase in the general price level of goods and services.
Over the last five years, in the country of Midlothian, both the labor supply and the real stock of physical
capital have increased by 20% and real GDP increased 22%. The reason that real GDP growth was greater
than input growth over the period is most likely that: - correct answer total factor productivity increased.
Any excess of real GDP growth over the rate of growth in labor and capital indicates there has been an
increase in total factor productivity.
Which of the following is least likely to be considered a stated goal of the International Accounting
Standards Board (IASB)? - correct answer The IASB has four stated goals:
Develop global accounting standards requiring transparency, comparability, and high quality in financial
statements.
Promote the use of global accounting standards.
Account for the needs of emerging markets and small firms when implementing global accounting
standards.
Achieve convergence between various national accounting standards and global accounting standards.
A company issues an annual-pay bond with a face value of $135,662, maturity of 4 years, and 7%
coupon, while market interest rates for its bonds are 8%. What is the unamortized discount at the end of
the first year? - correct answer Face value of bonds = $135,662.
Proceeds from bond sale: I/Y = 8.00%; N = 4; PMT = $135,662 × 0.07 = $9,496.34; FV = $135,662; CPT PV
= $131,169
Unamortized discount at issuance = $135,662 - $131,169 = $4,493.
First year interest expense = $131,169 × 0.08 = $10,494.
Coupon payment = $135,662 × 0.07 = $9,496.
