AWMA Test Review 1 UPDATED ACTUAL
Exam Questions and CORRECT Answers
If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, what is its
taxable income?
A. $0
B. $25,000
C. $50,000
D. $100,000 - CORRECT ANSWER The net profits of a corporation are subject to federal
income taxation. This tax is levied on corporate taxable income before payment of dividends to
common and preferred shareholders. Thus, if ABC Corporation has net profits of $100,000 and
distributes $50,000 as dividends, its taxable income is still $100,000. Distribution of profits as
dividends does not reduce taxable income for a corporation
Qualified Plans - CORRECT ANSWER Meet the stringent requirements of the IRC as
well as those of the ERISA and therefore qualify for favorable tax treatment. In pension and
profit sharing plans an employee is generally not taxed on employer contributions or
accumulated earnings until the funds are actually received from the plan. The employer receives
a deduction at the time of contribution. for qualified stock option plans the employee is not taxed
until it is sold.
Nonqualified plans - CORRECT ANSWER Do not qualify for special tax treatment. They
don't permit the employer to take a deduction for plan contributions until the employee reports
income from the plan, which is often at retirement. Earnings not tax deferred - earnings are taxed
to the employer or employee depending on the plans design
Nonqualified deferred comp plan - CORRECT ANSWER Do not qualify for the same
special tax treatment. They do not permit the employer to take a deduction for plan contributions
until the employee reports income from the plan, which is often at retirement. Also, the earnings
on plan assets are not tax deferred; instead, earnings are taxed to the sponsor(employer) or to the
participant (employee), depending on the plan design. The irs rules do permit an employee to
agree to defer income to a nonqualified plan and not be taxed on the deferral until some point in
the future if the 3 rules are followed.
,Economic Benefit - CORRECT ANSWER A taxpayer has income when he receives the
economic benefit of the proceeds. This occurs when the employer irrevocably places funds for
the benefit of the employee beyond the reach of the employers creditors. Income is thus received
if the employee does not have actual or even constructive receipt.(applies to funded plans)
Corporate owned life insurance - CORRECT ANSWER commonly used by employers to
informally fund future benefit obligations such as those promised under a deferred comp plan.
As the owner of the policies the employer is responsible for paying the premiums. The employer
is also the beneficiary of the policies and retains all rights to policy benefits, including the cash
value buildup and the death proceeds.
COLI is attractive to employers because it - CORRECT ANSWER 1. Provides
psychological assurance to deferred comp plan participants that their benefit are secure.
2. reduces strain on the companys cash flow when plan distributions are due
3. provides tax-deferred, and possibly tax free buildup of cash value; and
4. enables the employer to recover some/all of the plan costs.
Changes that have occurred since investment firms changed from private partnerships to publicly
traded companies include all of the following except:
A. risk taking has increased.
B. profits can be privatized (bonuses) and losses socialized (bailouts).
C. there is greater individual accountability.
D. partners no longer share in both the profits and losses of the firm. - CORRECT
ANSWER C. The repeal of Glass-Steagall accelerated the conversion of investment firms
that had been structured as partnerships into publicly traded companies that took on more risk.
This transferred much of the risk and accountability from general partners to public shareholders
Equity REITS - CORRECT ANSWER Equity REITs own real estate properties and earn
income from rents, and made up 94.4% of the REIT market (by capitalization) at the end of
2015. Upon the sale of the properties, a capital gain is earned. Generally, income from rents can
, be expected to increase each year. Equity REITs are appropriate when one objective is to provide
an inflation hedge
Mortgage REITs. - CORRECT ANSWER Mortgage REITs are similar to bond mutual
funds, and make up approximately 5.6% of the REIT market. No ownership interest in the
underlying real estate property exists. Instead, the fund invests in mortgages used by equity
owners of the real estate properties to finance their acquisition of the properties. Mortgage REITs
may also invest in GNMA. pools or other mortgage backed securities. They generally do not
participate in capital gains on the sale of real estate properties, but their income is higher than
that of equity REITs. Mortgage REITs do not provide inflation
protection.
Which one of the following is an advantage of equity REITs over mortgage REITs? - CORRECT
ANSWER Equity REITs can participate in the appreciation of the underlying properties.
Equity REITs own the underlying real estate properties, giving the owners an opportunity to
participate in the net cash flows from the operation of the properties and in any appreciation in
the market price of the properties.
- CORRECT ANSWER The intent of Dodd-Frank was to "harmonize" and blend
fiduciary rules that would pertain to both broker-dealers and investment advisers. Investment
advisers are held to a fiduciary standard and broker-dealers to a suitability standard under the
current rules
One of the most important financial goals of wealthy individuals is - CORRECT
ANSWER The most-stated life goals for wealthy individuals are having good health,
travelling the world, and achieving financial success. To achieve financial success, the most
common financial goals are protecting wealth, assuring retirement lifestyle, minimizing taxes,
and leaving an estate to their heirs.
There are several kinds of strategies hedge funds use, and some approaches can be categorized.
The CAIA divides hedge funds into four main categories: - CORRECT ANSWER 1.
market directional,
2. corporate restructuring,
Exam Questions and CORRECT Answers
If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, what is its
taxable income?
A. $0
B. $25,000
C. $50,000
D. $100,000 - CORRECT ANSWER The net profits of a corporation are subject to federal
income taxation. This tax is levied on corporate taxable income before payment of dividends to
common and preferred shareholders. Thus, if ABC Corporation has net profits of $100,000 and
distributes $50,000 as dividends, its taxable income is still $100,000. Distribution of profits as
dividends does not reduce taxable income for a corporation
Qualified Plans - CORRECT ANSWER Meet the stringent requirements of the IRC as
well as those of the ERISA and therefore qualify for favorable tax treatment. In pension and
profit sharing plans an employee is generally not taxed on employer contributions or
accumulated earnings until the funds are actually received from the plan. The employer receives
a deduction at the time of contribution. for qualified stock option plans the employee is not taxed
until it is sold.
Nonqualified plans - CORRECT ANSWER Do not qualify for special tax treatment. They
don't permit the employer to take a deduction for plan contributions until the employee reports
income from the plan, which is often at retirement. Earnings not tax deferred - earnings are taxed
to the employer or employee depending on the plans design
Nonqualified deferred comp plan - CORRECT ANSWER Do not qualify for the same
special tax treatment. They do not permit the employer to take a deduction for plan contributions
until the employee reports income from the plan, which is often at retirement. Also, the earnings
on plan assets are not tax deferred; instead, earnings are taxed to the sponsor(employer) or to the
participant (employee), depending on the plan design. The irs rules do permit an employee to
agree to defer income to a nonqualified plan and not be taxed on the deferral until some point in
the future if the 3 rules are followed.
,Economic Benefit - CORRECT ANSWER A taxpayer has income when he receives the
economic benefit of the proceeds. This occurs when the employer irrevocably places funds for
the benefit of the employee beyond the reach of the employers creditors. Income is thus received
if the employee does not have actual or even constructive receipt.(applies to funded plans)
Corporate owned life insurance - CORRECT ANSWER commonly used by employers to
informally fund future benefit obligations such as those promised under a deferred comp plan.
As the owner of the policies the employer is responsible for paying the premiums. The employer
is also the beneficiary of the policies and retains all rights to policy benefits, including the cash
value buildup and the death proceeds.
COLI is attractive to employers because it - CORRECT ANSWER 1. Provides
psychological assurance to deferred comp plan participants that their benefit are secure.
2. reduces strain on the companys cash flow when plan distributions are due
3. provides tax-deferred, and possibly tax free buildup of cash value; and
4. enables the employer to recover some/all of the plan costs.
Changes that have occurred since investment firms changed from private partnerships to publicly
traded companies include all of the following except:
A. risk taking has increased.
B. profits can be privatized (bonuses) and losses socialized (bailouts).
C. there is greater individual accountability.
D. partners no longer share in both the profits and losses of the firm. - CORRECT
ANSWER C. The repeal of Glass-Steagall accelerated the conversion of investment firms
that had been structured as partnerships into publicly traded companies that took on more risk.
This transferred much of the risk and accountability from general partners to public shareholders
Equity REITS - CORRECT ANSWER Equity REITs own real estate properties and earn
income from rents, and made up 94.4% of the REIT market (by capitalization) at the end of
2015. Upon the sale of the properties, a capital gain is earned. Generally, income from rents can
, be expected to increase each year. Equity REITs are appropriate when one objective is to provide
an inflation hedge
Mortgage REITs. - CORRECT ANSWER Mortgage REITs are similar to bond mutual
funds, and make up approximately 5.6% of the REIT market. No ownership interest in the
underlying real estate property exists. Instead, the fund invests in mortgages used by equity
owners of the real estate properties to finance their acquisition of the properties. Mortgage REITs
may also invest in GNMA. pools or other mortgage backed securities. They generally do not
participate in capital gains on the sale of real estate properties, but their income is higher than
that of equity REITs. Mortgage REITs do not provide inflation
protection.
Which one of the following is an advantage of equity REITs over mortgage REITs? - CORRECT
ANSWER Equity REITs can participate in the appreciation of the underlying properties.
Equity REITs own the underlying real estate properties, giving the owners an opportunity to
participate in the net cash flows from the operation of the properties and in any appreciation in
the market price of the properties.
- CORRECT ANSWER The intent of Dodd-Frank was to "harmonize" and blend
fiduciary rules that would pertain to both broker-dealers and investment advisers. Investment
advisers are held to a fiduciary standard and broker-dealers to a suitability standard under the
current rules
One of the most important financial goals of wealthy individuals is - CORRECT
ANSWER The most-stated life goals for wealthy individuals are having good health,
travelling the world, and achieving financial success. To achieve financial success, the most
common financial goals are protecting wealth, assuring retirement lifestyle, minimizing taxes,
and leaving an estate to their heirs.
There are several kinds of strategies hedge funds use, and some approaches can be categorized.
The CAIA divides hedge funds into four main categories: - CORRECT ANSWER 1.
market directional,
2. corporate restructuring,
