Financial Statement Analysis For CFA Level 1
There are 20 questions in this test from the Financial Statement Analysis section of the CFA Level 1 syllabus. You will get 30 minutes to complete the test.
- 1.
Cash outflows for payment of cash dividends is an example of:
- A.
Cash flows from operating activities
- B.
Cash flows from financing activities
- C.
Cash flows from investing activities
Correct Answer
B. Cash flows from financing activitiesExplanation
Providing stockholders with a return on their investment in the form of a cash dividend is a financing activity.Rate this question:
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- 2.
Basic earnings per share is calculated as:
- A.
[Net Income- Dividends]/Weighted Avg # of shares outstanding
- B.
[Net Income-Preferred Dividends]/Weighted Avg # of common shares outstanding
- C.
[Net Income]/[Common shares outstanding]
Correct Answer
B. [Net Income-Preferred Dividends]/Weighted Avg # of common shares outstandingExplanation
The basis EPS formula aims to derive earnings per share of common stock for the amount of the year that the common shares were outstanding. It is for this reason that preferred dividends are not included and the weighted average numbers of common shares outstanding are used in the denominator.Rate this question:
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- 3.
The opinion paragraph of an independent auditor's report begins, "In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position..." This language states ________.
- A.
An unqualified opinion
- B.
A disclaimer of opinion
- C.
A qualified opinion
Correct Answer
A. An unqualified opinionExplanation
These references do not constitute a disclaimer or a qualified or adverse opinion, therefore, the language refers to an unqualified opinion.Rate this question:
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- 4.
A firm has a net income of 200, an increase in accounts receivables of 30, depreciation of 55 and a decrease in accounts payable of 25. Its operating cash flow is ________.
- A.
200
- B.
230
- C.
285
Correct Answer
A. 200Explanation
150 operating cash flow 150. = net income + noncash expenses - non-cash revenues = 200 + 55 - 30 - 25 = 200Rate this question:
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- 5.
Stock dividends and stock splits differ in that
- A.
Stock splits are paid in additional shares of common stock, whereas a stock dividend results in replacement of all outstanding shares with a new issue of shares
- B.
A stock dividend results in a decline in the par value per share
- C.
In a stock split a larger number of new shares replaces the outstanding shares
Correct Answer
C. In a stock split a larger number of new shares replaces the outstanding sharesExplanation
A stock split does not involve any accounting entries. Instead, a larger number of new shares are issued to replace and retire all outstanding shares.Rate this question:
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- 6.
Which of the following would be classified a cash inflow from investing activities?
- A.
Cash paid to retire bonds
- B.
Cash paid for dividends
- C.
Proceeds from selling investments in the equity securities of other companies
Correct Answer
C. Proceeds from selling investments in the equity securities of other companiesExplanation
All other responses qualify as cash flows from financing activities.Rate this question:
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- 7.
Which of the following would be classified a cash inflow from investing activities? I. Proceeds from selling investments in the debt securities of other entities, except cash equivalents II. Proceeds from collecting the principal amount of loans III. Proceeds from selling investments in the equity securities of other companies
- A.
Only I is correct
- B.
I and II are correct
- C.
All responses are correct
Correct Answer
C. All responses are correctExplanation
All responses qualify as cash inflows from investing activities.Rate this question:
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- 8.
Under the treasury stock method, primary earnings per share data are computed as if options and warrants (outstanding for the entire year) were exercised at the
- A.
Beginning of the period and as if the funds obtained thereby were used to purchase common stock at the current market price in effect at the end of the period
- B.
End of the period and as if the funds obtained thereby were used to purchase common stock at the current market price in effect at the end of the period
- C.
Beginning of the period and as if the funds obtained thereby were used to purchase common stock at the average market price during the period
Correct Answer
C. Beginning of the period and as if the funds obtained thereby were used to purchase common stock at the average market price during the periodExplanation
The treasury stock method assumes the exercise of outstanding options and warrants at the beginning of the period or at time of issuance, if later. It also assumes that the proceeds from the exercise were used to purchase common stock at the average market price during the period.Rate this question:
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- 9.
Retained earnings represent:
- A.
Undistributed net income in the last accounting period
- B.
Accumulated, undistributed earnings since inception
- C.
Earnings inclusive of any paid-in capital since inception
Correct Answer
B. Accumulated, undistributed earnings since inceptionExplanation
Any undistributed net income during a period is swept into the "retained earnings" account.Rate this question:
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- 10.
Which of the following are operating cash flows? I. Interest received II. Interest paid III. Dividends received IV. Dividends paid
- A.
I, II, III & IV
- B.
I & III
- C.
I, II & III
Correct Answer
C. I, II & IIIExplanation
It is very important to remember the following points about dividends and interests:
• Dividends received from stock investments are considered operating cash flows.
• Dividends paid on equity are considered financing cash flows.
• Interest payments on debt are considered operating cash flows.
• Interest received from debt investments are considered operating cash flows.Rate this question:
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- 11.
Which of the following is not a current asset?
- A.
Accumulated Depreciation
- B.
Accounts Receivable
- C.
Notes Receivable
Correct Answer
A. Accumulated DepreciationExplanation
Accumulated Depreciation is a contra account to the fixed asset account(s)Rate this question:
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- 12.
Companies report accounts receivable at:
- A.
Their net realizable value
- B.
Their liquidation value
- C.
The lower-of-cost-or-market value
Correct Answer
A. Their net realizable valueExplanation
The net realizable value of the accounts receivable is equal to the total amount receivable less an allowance for uncollectible items. In practice, companies report accounts receivable at their net realizable value.Rate this question:
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- 13.
A firm is purchased for more than the fair market value of its assets. The excess is:
- A.
Written off against the retained earnings on the balance sheet
- B.
Treated as an extraordinary loss & presented net of taxes on the income statement
- C.
Considered as "goodwill"
Correct Answer
C. Considered as "goodwill"Explanation
Goodwill is defined as the price paid in excess of the fair market value of the assets of the target firm. Under US GAAP, only Goodwill generated during acquisitions is capitalized; it does not allow capitalization of internally generated Goodwill.Rate this question:
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- 14.
If an auditor issues an "adverse opinion" qualification in her opinion, she is referring to the fact that:
- A.
The firm's financial statements do not fairly represent the company's financial performance and position
- B.
There is considerable uncertainty in the firm's asset-liability valuation, thus causing a concern about its operational health
- C.
The firm has inadequate controls in place and needs an on-going, frequent audit
Correct Answer
A. The firm's financial statements do not fairly represent the company's financial performance and positionExplanation
An adverse opinion is rendered in cases where financial statements are not prepared in accordance with accepted accounting principles, and this has a material effect on the fair presentation of the statements.Rate this question:
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- 15.
As a general rule, revenue is normally recognized when it is ________.
- A.
Measurable and received
- B.
Measurable and earned
- C.
Realizable and earned
Correct Answer
C. Realizable and earnedExplanation
Revenue is generally recognized when it is realizable and earned.Rate this question:
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- 16.
Which of the following would be considered a liability that arises from financing activities?
- A.
Accounts payable
- B.
Notes payable
- C.
Taxes payable
Correct Answer
B. Notes payableExplanation
Notes payable represents a liability that originates from financing activities. Liabilities that arise from financing activities typically require compensation in the form of interest. This can be contrasted with liabilities that arise from operating activities where interest bearing credit is not being extended but the liability arises from the "normal course of business".Rate this question:
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- 17.
Which of the following best describes an income statement?
- A.
An income statement reports changes over a period of time in component accounts that comprise the ownership of a firm
- B.
An income statement summarizes the financial position of a company at a given point in time
- C.
An income statement measures a company's financial performance over a specified period of time
Correct Answer
C. An income statement measures a company's financial performance over a specified period of timeExplanation
An income statement measures a company's financial performance over a specified period of time. This statement accurately describes the purpose and function of an income statement. It provides a summary of the company's revenues, expenses, and net income or loss during a specific period, typically a month, quarter, or year. By analyzing the income statement, stakeholders can evaluate the company's profitability and assess its financial health.Rate this question:
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- 18.
Which of the following best describes an balance sheet?
- A.
It reports cash receipts and cash disbursements for a specific accounting period
- B.
It reports investment activities for a specified accounting period
- C.
It reports the amount and composition of assets and liabilities for a specific accounting period
Correct Answer
C. It reports the amount and composition of assets and liabilities for a specific accounting periodExplanation
A balance sheet provides a detailed listing of a company's assets, liabilities, and equity at a point in time. This provides a glimpse at a company's financial condition.Rate this question:
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- 19.
Firm A capitalized an expense and an otherwise identical Firm B expensed it. Then,
- A.
A shows higher operating cash flow and investing cash flow
- B.
A shows higher operating cash flow and lower investing cash flow
- C.
A shows lower operating cash flow and investing cash flow
Correct Answer
B. A shows higher operating cash flow and lower investing cash flowExplanation
Since the capitalized expense represents an investing cash outflow, the investing cash flow is lower for A. Firm B charges all the expenditure to operating cash flow and has a lower operating cash flow than A.Rate this question:
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- 20.
The following asset is subject to the least amount of depreciation or amortization during its useful life:
- A.
Land
- B.
Warehouse
- C.
Patents
Correct Answer
A. LandExplanation
Land is not subject to any depreciation. The useful life of land does not diminish over time as its economic value does not diminish based on use.Rate this question:
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