CFA Level 1 CFAI Mock Exam I (AM) ||
Complete Questions & Answers (Graded A+)
What are the effects on aggregate demand in the current period if there's an increase in
expected future incomes and an increase in the money supply? - ANSWER-Both an
increase in expected future incomes and an increase in the money supply would
INCREASE aggregate demand
Increasing the money supply tends to decrease interest rates which leads to greater
consumer spending and increased investment by businesses.
An increase in expected future incomes cause consumers to increase current
expenditures (reducing current savings) in anticipation of higher future incomes
When prices are declining, the FIFO inventory method is preferred to LIFO because: -
ANSWER-FIFO provides a better estimate of inventory values
Whether prices are increasing or decreasing, FIFO provides a better estimate of
inventory values while LIFO provides a better estimate of: - ANSWER-cost of sales
When prices are stable, the difference between LIFO and FIFO estimates of inventory
or cost of sales is: - ANSWER-There is no difference in estimates of inventory or cost of
sales under LIFO or FIFO
An analyst estimates a stock has a 40% probability of earning a 10% return, a 40%
probability of earning a 12.5% return, and a 20% probability of earning a 30% return.
The stock's standard deviation of returns based on this returns model is closest to: -
ANSWER-7.58%
Expected value -->
(0.40)(10.00) + (0.40)(12.50) + (0.20)(30.00) = 15%
Variance -->
(0.40)(10 - 15)^2 + (0.40)(12.5 - 15)^2 + (0.20)(30 - 15)^2 = 57.50
Standard deviation = SQRT(57.50) = 7.58%
Shortfall risk is best described as the probability that: - ANSWER-the portfolio value will
fall below some minimum level at a future date
Downgrade risk is best described as the probability: - ANSWER-of a credit rating
downgrade due to possible earnings shortfalls
Default risk is best described as the probability: - ANSWER-of failing to make a
contractually promised payment
,Longboat, Inc., sold a luxury passenger boat from its inventory on December 31 for
$2,000,000. It is estimated that Longboat will incur $100,000 in warranty expenses
during its 5-year warranty period. Longboat's tax rate is 30%.
To account for the tax implications of the warranty obligation prior to incurring warranty
expenses, Longboat should: - ANSWER-record a DTA of $30,000
Incorrect production decisions are most likely to occur when the inflation rate is: -
ANSWER-either higher or lower than expected
Either higher-than-expected or lower-than-expected inflation can cause producers to
misinterpret unexpected changes in the: - ANSWER-price level signals of increases or
decreases in demand, and produce more or less than the equilibrium quantity of output
When demand is inelastic, a price increase will cause: - ANSWER-a increase in the
total expenditure on a good
If demand is inelastic, the percentage change in quantity demanded is smaller than the
percentage change in price; quantity demanded is relatively unresponsive to price
changes.
The presentation format of balance sheet data that standardizes the first-year values to
1.0 and presents subsequent years' amounts relative to 1.0 is: - ANSWER-a horizontal
common-size balance sheet
For 2021, Belcher Motors reported a decrease in its deferred tax liabilities, a decrease
in its deferred tax assets, and an increase in its valuation allowance.
To an analyst, this would most likely suggest that the company has: - ANSWER-
decreased its estimate of future profitability
The increase in valuation allowance tells us that the company has decreased its
estimate of its future profitability and thus its ability to realize the benefits of its deferred
tax assets.
Type I error: - ANSWER-rejecting the null hypothesis when it is true
Rejecting the null hypothesis when it is true is know as: - ANSWER-Type I error
The power of a test is the probability of: - ANSWER-rejecting the null hypothesis when it
is false
Which type of test is indicated by the following:
H_a: X =/ 0 - ANSWER-H_a: X =/0 indicates a two-tailed test
, Which type of test is indicated by the following:
H_a: X < 0 or H_a: X > 0 - ANSWER-
From an initial equilibrium, an increase in real money balances will leave households
and businesses with more money than they wish to hold, so they will: - ANSWER-
purchase interest-bearing securities, driving their prices up and yields down until a new
equilibrium short-term rate is established
The Standard concerning independence and objectivity recommends that Taylor: -
ANSWER-use and pay for commercial transportation, if available to be within
compliance of Standard I(B) Independence and Objectivity.
Standard I(B) Independence and Objectivity include the recommendation that analysts
on company visits should: - ANSWER-pay their own travel expenses and use
commercial transportation if it is available.
Ruth Brett, a Level I CFA candidate, feels nervous and unprepared the night before the
exam. Brett writes a few key notes on the bottom of her shoe. At the exam, Brett sees
the large number of proctors present and decides not to risk getting caught and does
not look at her shoe.
According to the CFA Institute Code of Ethics and Standards of Professional Conduct,
Brett is: - ANSWER-in violation of BOTH the Code of Ethics and the Standard governing
conduct as participants in CFAI programs for taking the notes into the examination
room.
Brett violated STANDARD VII(A) CONDUCT AS PARTICPANTS IN CFAI PROGRAMS
because she compromised the integrity of the exam, whether she used the notes or not.
Brett violated the CODE OF ETHICS by not acting "with integrity, competence,
diligence, respect, and in an ethical manner."
Standard III(A) Loyalty, Prudence, and Care requires that members and candidates
place their clients' interests BEFORE or AFTER their employer's interests. - ANSWER-
BEFORE; Standard III(A) Loyalty, Prudence, and Care requires that members place
their clients' interests before their employer's interests
In formulating her report on GammaCorp's common stock, Barb Kramer, CFA, did a
complex series of statistical tests on the company's past sales and earnings. Based on
this statistical study, Kramer stated in her report that, "GammaCorp's earnings growth
for the next five years will average 15% per year." Her conclusion was based in part on
a regression analysis with a high level of statistical significance.
Complete Questions & Answers (Graded A+)
What are the effects on aggregate demand in the current period if there's an increase in
expected future incomes and an increase in the money supply? - ANSWER-Both an
increase in expected future incomes and an increase in the money supply would
INCREASE aggregate demand
Increasing the money supply tends to decrease interest rates which leads to greater
consumer spending and increased investment by businesses.
An increase in expected future incomes cause consumers to increase current
expenditures (reducing current savings) in anticipation of higher future incomes
When prices are declining, the FIFO inventory method is preferred to LIFO because: -
ANSWER-FIFO provides a better estimate of inventory values
Whether prices are increasing or decreasing, FIFO provides a better estimate of
inventory values while LIFO provides a better estimate of: - ANSWER-cost of sales
When prices are stable, the difference between LIFO and FIFO estimates of inventory
or cost of sales is: - ANSWER-There is no difference in estimates of inventory or cost of
sales under LIFO or FIFO
An analyst estimates a stock has a 40% probability of earning a 10% return, a 40%
probability of earning a 12.5% return, and a 20% probability of earning a 30% return.
The stock's standard deviation of returns based on this returns model is closest to: -
ANSWER-7.58%
Expected value -->
(0.40)(10.00) + (0.40)(12.50) + (0.20)(30.00) = 15%
Variance -->
(0.40)(10 - 15)^2 + (0.40)(12.5 - 15)^2 + (0.20)(30 - 15)^2 = 57.50
Standard deviation = SQRT(57.50) = 7.58%
Shortfall risk is best described as the probability that: - ANSWER-the portfolio value will
fall below some minimum level at a future date
Downgrade risk is best described as the probability: - ANSWER-of a credit rating
downgrade due to possible earnings shortfalls
Default risk is best described as the probability: - ANSWER-of failing to make a
contractually promised payment
,Longboat, Inc., sold a luxury passenger boat from its inventory on December 31 for
$2,000,000. It is estimated that Longboat will incur $100,000 in warranty expenses
during its 5-year warranty period. Longboat's tax rate is 30%.
To account for the tax implications of the warranty obligation prior to incurring warranty
expenses, Longboat should: - ANSWER-record a DTA of $30,000
Incorrect production decisions are most likely to occur when the inflation rate is: -
ANSWER-either higher or lower than expected
Either higher-than-expected or lower-than-expected inflation can cause producers to
misinterpret unexpected changes in the: - ANSWER-price level signals of increases or
decreases in demand, and produce more or less than the equilibrium quantity of output
When demand is inelastic, a price increase will cause: - ANSWER-a increase in the
total expenditure on a good
If demand is inelastic, the percentage change in quantity demanded is smaller than the
percentage change in price; quantity demanded is relatively unresponsive to price
changes.
The presentation format of balance sheet data that standardizes the first-year values to
1.0 and presents subsequent years' amounts relative to 1.0 is: - ANSWER-a horizontal
common-size balance sheet
For 2021, Belcher Motors reported a decrease in its deferred tax liabilities, a decrease
in its deferred tax assets, and an increase in its valuation allowance.
To an analyst, this would most likely suggest that the company has: - ANSWER-
decreased its estimate of future profitability
The increase in valuation allowance tells us that the company has decreased its
estimate of its future profitability and thus its ability to realize the benefits of its deferred
tax assets.
Type I error: - ANSWER-rejecting the null hypothesis when it is true
Rejecting the null hypothesis when it is true is know as: - ANSWER-Type I error
The power of a test is the probability of: - ANSWER-rejecting the null hypothesis when it
is false
Which type of test is indicated by the following:
H_a: X =/ 0 - ANSWER-H_a: X =/0 indicates a two-tailed test
, Which type of test is indicated by the following:
H_a: X < 0 or H_a: X > 0 - ANSWER-
From an initial equilibrium, an increase in real money balances will leave households
and businesses with more money than they wish to hold, so they will: - ANSWER-
purchase interest-bearing securities, driving their prices up and yields down until a new
equilibrium short-term rate is established
The Standard concerning independence and objectivity recommends that Taylor: -
ANSWER-use and pay for commercial transportation, if available to be within
compliance of Standard I(B) Independence and Objectivity.
Standard I(B) Independence and Objectivity include the recommendation that analysts
on company visits should: - ANSWER-pay their own travel expenses and use
commercial transportation if it is available.
Ruth Brett, a Level I CFA candidate, feels nervous and unprepared the night before the
exam. Brett writes a few key notes on the bottom of her shoe. At the exam, Brett sees
the large number of proctors present and decides not to risk getting caught and does
not look at her shoe.
According to the CFA Institute Code of Ethics and Standards of Professional Conduct,
Brett is: - ANSWER-in violation of BOTH the Code of Ethics and the Standard governing
conduct as participants in CFAI programs for taking the notes into the examination
room.
Brett violated STANDARD VII(A) CONDUCT AS PARTICPANTS IN CFAI PROGRAMS
because she compromised the integrity of the exam, whether she used the notes or not.
Brett violated the CODE OF ETHICS by not acting "with integrity, competence,
diligence, respect, and in an ethical manner."
Standard III(A) Loyalty, Prudence, and Care requires that members and candidates
place their clients' interests BEFORE or AFTER their employer's interests. - ANSWER-
BEFORE; Standard III(A) Loyalty, Prudence, and Care requires that members place
their clients' interests before their employer's interests
In formulating her report on GammaCorp's common stock, Barb Kramer, CFA, did a
complex series of statistical tests on the company's past sales and earnings. Based on
this statistical study, Kramer stated in her report that, "GammaCorp's earnings growth
for the next five years will average 15% per year." Her conclusion was based in part on
a regression analysis with a high level of statistical significance.
