CFA Level I Exam Practice Questions
And Correct Answers (Verified Answers)
Plus Rationales 2027 Q&A | Instant
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Question 1
Which of the following best describes the primary objective of financial
reporting?
A. To maximize a company's stock price
B. To provide information useful to investors and creditors in making
economic decisions
C. To eliminate uncertainty about future cash flows
D. To determine the market value of a company's equity
Answer: B. To provide information useful to investors and creditors in
making economic decisions
Rationale: Financial reporting is designed to provide decision-useful
information to existing and potential investors, lenders, and other
,creditors. It does not eliminate uncertainty or directly determine market
value.
Question 2
Under accrual accounting, revenue is generally recognized when:
A. Cash is received
B. An invoice is issued
C. The earnings process is substantially complete and revenue is earned
D. Management forecasts that cash will be received
Answer: C. The earnings process is substantially complete and revenue is
earned
Rationale: Accrual accounting recognizes revenue when it is earned, rather
than necessarily when cash is received.
Question 3
A company has current assets of $500,000 and current liabilities of
$250,000. What is its current ratio?
A. 0.50
B. 1.00
C. 2.00
D. 2.50
,Answer: C. 2.00
Rationale: Current ratio = Current assets ÷ Current liabilities = $500,000 ÷
$250,000 = 2.00.
Question 4
Which financial statement reports a company's assets, liabilities, and
shareholders' equity at a specific point in time?
A. Income statement
B. Statement of cash flows
C. Balance sheet
D. Statement of retained earnings
Answer: C. Balance sheet
Rationale: The balance sheet presents the company's financial position at a
specific date and is based on the fundamental equation Assets = Liabilities
+ Equity.
Question 5
If inventory is purchased for cash, what is the immediate effect on total
assets?
A. Total assets increase
B. Total assets decrease
, C. Total assets remain unchanged
D. Equity increases
Answer: C. Total assets remain unchanged
Rationale: Cash decreases while inventory increases by the same amount.
Therefore, total assets are unchanged immediately after the transaction.
Question 6
Which of the following is most likely a financing cash flow?
A. Purchase of inventory
B. Sale of equipment
C. Issuance of common shares
D. Payment to suppliers
Answer: C. Issuance of common shares
Rationale: Issuing common shares provides financing to the company and
is classified as a financing cash flow.
Question 7
A company reports net income of $120,000, depreciation expense of
$20,000, and an increase in accounts receivable of $15,000. Using the
indirect method, cash flow from operations, before other adjustments, is:
And Correct Answers (Verified Answers)
Plus Rationales 2027 Q&A | Instant
Download Pdf
Question 1
Which of the following best describes the primary objective of financial
reporting?
A. To maximize a company's stock price
B. To provide information useful to investors and creditors in making
economic decisions
C. To eliminate uncertainty about future cash flows
D. To determine the market value of a company's equity
Answer: B. To provide information useful to investors and creditors in
making economic decisions
Rationale: Financial reporting is designed to provide decision-useful
information to existing and potential investors, lenders, and other
,creditors. It does not eliminate uncertainty or directly determine market
value.
Question 2
Under accrual accounting, revenue is generally recognized when:
A. Cash is received
B. An invoice is issued
C. The earnings process is substantially complete and revenue is earned
D. Management forecasts that cash will be received
Answer: C. The earnings process is substantially complete and revenue is
earned
Rationale: Accrual accounting recognizes revenue when it is earned, rather
than necessarily when cash is received.
Question 3
A company has current assets of $500,000 and current liabilities of
$250,000. What is its current ratio?
A. 0.50
B. 1.00
C. 2.00
D. 2.50
,Answer: C. 2.00
Rationale: Current ratio = Current assets ÷ Current liabilities = $500,000 ÷
$250,000 = 2.00.
Question 4
Which financial statement reports a company's assets, liabilities, and
shareholders' equity at a specific point in time?
A. Income statement
B. Statement of cash flows
C. Balance sheet
D. Statement of retained earnings
Answer: C. Balance sheet
Rationale: The balance sheet presents the company's financial position at a
specific date and is based on the fundamental equation Assets = Liabilities
+ Equity.
Question 5
If inventory is purchased for cash, what is the immediate effect on total
assets?
A. Total assets increase
B. Total assets decrease
, C. Total assets remain unchanged
D. Equity increases
Answer: C. Total assets remain unchanged
Rationale: Cash decreases while inventory increases by the same amount.
Therefore, total assets are unchanged immediately after the transaction.
Question 6
Which of the following is most likely a financing cash flow?
A. Purchase of inventory
B. Sale of equipment
C. Issuance of common shares
D. Payment to suppliers
Answer: C. Issuance of common shares
Rationale: Issuing common shares provides financing to the company and
is classified as a financing cash flow.
Question 7
A company reports net income of $120,000, depreciation expense of
$20,000, and an increase in accounts receivable of $15,000. Using the
indirect method, cash flow from operations, before other adjustments, is:
