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CFA level1mock 2015 version 2 june PM questions

CFA Level I 2nd Mock Exam
June, 2015
Revision 1

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CFA Level I Mock Exam 2 – Questions (PM)

FinQuiz.com – 2nd Mock Exam 2015 (PM Session)





Ethical and Professional Standards



Quantitative Methods






Financial Reporting and Analysis



Corporate Finance



Equity Investments



Derivative Investments



Fixed Income Investments



Alternative Investments



Portfolio Management




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CFA Level I Mock Exam 2 – Questions (PM)

Questions 1 to 18 relate to Ethical and Professional Standards

Laura Elliot is a broker at Housegate, a broker-dealer firm. She undertakes trades
on behalf of clients with a high net worth. She discovers that one of her clients
has engaged in the embezzlement of portfolio funds, which classifies as an illegal
activity under domestic trading regulations. In order to comply with the CFA
Institute Standards of Professional Conduct, Elliot’s preliminary course of action
would be to:
A. request for a different assignment.
B. report the violation to her supervisor.
C. report the violation to regulatory authorities.


Standard I (A), Knowledge of the Law, requires members and/or candidates to:
A. document a violation when disassociating themselves from an illegal
B. have detailed knowledge of all the laws that could potentially govern their
C. abide by the rules and regulations related to the administration of the CFA


The CFA Institute Code of Ethics requires members and candidates to:
A. encourage others to practice in a professional and ethical manner that will
reflect credit on the profession.
B. ensure the preservation of capital market integrity is given priority over
protecting employer interests.
C. use reasonable care and judgment to achieve and maintain independence
and objectivity in their professional activities.


In order to comply with the CFA Institute Standards of Professional Conduct
relating to duties to employers, members and candidates:
A. should not enter into an independent business while still employed.
B. are encouraged to recommend that their employers adopt and distribute a
code of ethics.
C. may obtain an assurance from a subordinate who has violated the Codes
and Standards that the wrongdoing will not recur.

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CFA Level I Mock Exam 2 – Questions (PM)


Adequate compliance procedures should:
A. meet regulatory requirements.
B. ensure supervisors do not delegate their duties.
C. be designed to anticipate every potential violation.


Samantha Town is a portfolio manager at Wallace Associates situated in Dallas,
Texas. This year Town has delivered exceptional performance for one of her
client’s accounts. In exchange for the performance, her client has offered her two
front row tickets to an opera as well as the opportunity to meet the stage cast after
the show.
To ensure she does not violate the CFA Standards of Professional Conduct,
Town’s best course of action would be to:
A. reject the offer.
B. Inform her employer after attending the opera show.
C. accept the offer after obtaining permission from all relevant parties.


Upon reviewing the materials received during the investigation of a professional
conduct inquiry, a designated officer’s preliminary course of action would be to:
A. revoke the member’s CFA charter.
B. suspend the member’s membership.
C. propose a sanction which can be rejected by the member.


Which of the following is a desirable practice of a firm which has a firewall
policy implemented for its research and investment banking divisions?
A. Prohibiting communication between research and investment banking
B. Basing the research analyst’s compensation on a flat rate without any
contingent bonuses.
C. To improve the accuracy of investment analysis, investment banking
personnel regularly review research reports prepared by analysts.

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CFA Level I Mock Exam 2 – Questions (PM)


Recommended written trade allocation procedures least likely include:
A. processing orders on a first-come, first-served basis.
B. allocating trades for new issues by portfolio manager.
C. giving all accounts participating in a block trade a weighted price based on
their order value.


Joyce Parker is a portfolio manager serving East AM Associates. Parker is
calculating the return generated on one of her client’s accounts for the current
fiscal year. She calculates the net-of-fees return but does not subtract investment
management fees rendering the calculated return noncompliant with the GIPS
standards. East AM Associates has complied with the GIPS standards since
establishment even though local laws do not mandate firms to do so.
Is Parker in violation of the CFA Institute Standards of Professional Conduct?
A. Yes.
B. No, she has not violated any law.
C. No, failure to comply with the GIPS standards does not result in a
violation of the Standards of Professional Conduct.


Ella Lawson is the chief executive at Rome Bank, a commercial banking
enterprise. On behalf of the bank Rome will be providing funding to a
manufacturing enterprise seeking to expand its operations. During her visit to the
manufacturer’s factory, Lawson overhears two employees on the production floor
discussing the likelihood of their employer’s inability to carry out expansion.
Lawson holds shares of the enterprise and decides to sell her holding and reject
providing financial support.
Lawson is most likely in violation of the CFA Institute Standard of Professional
Conduct relating to:
A. loyalty, prudence and care.
B. diligence and reasonable basis.
C. material, nonpublic information.

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CFA Level I Mock Exam 2 – Questions (PM)


Gus Horace is a real estate advisor situated in a developing country. Horace is
attempting to sell agricultural land, on behalf of the landowner, to a restaurant
chain seeking to grow its own produce. The land lies parallel to a river where
industrial waste is frequently dumped. In marketing the land to the potential client
Horace states, ‘This s a purchase you will not regret. You should more than likely
expect to enjoy a healthy crop in your first year of farming.’ Horace does not
disclose the fact that the original landowner is an acquaintance of his.
Horace is most likely in violation of the standard relating to:
A. fair dealing.
B. misconduct.
C. loyalty, prudence and care.


Martina Gibbons is a CFA Level II Candidate, who is yet to register for the Level
III exam. During an interview, Gibbons makes the following two statements:
Statement 1: “I have successfully completed the first two levels of the CFA
exam program.”
Statement 2: “The CFA program overstresses areas such as financial
analysis which I believe are unnecessary at the Level I stage.”
Which of the following statements most likely represents a violation of the
standards relating to Responsibilities as a CFA Institute Member or CFA
A. Statement 1 only.
B. Statement 2 only.
C. Both of the statements.

14. A firm is eligible for claiming compliance to the GIPS standards if:
A. the firm, as a whole, fully meets all the requirements.
B. it undertakes a verification of an investment management firm.
C. it provides ancillary support to an investment management firm.

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CFA Level I Mock Exam 2 – Questions (PM)


Verification least likely serves to:
A. provide marketing advantages to a firm.
B. ensure the accuracy of a performance presentation.
C. test whether disclosure policies are designed to present performance in
compliance with the GIPS standards.


Which of the following is least likely a criterion for including a portfolio in a
A. Ex-post criteria
B. Portfolio existence
C. Portfolio manager discretion


To be able to rely on the integrity of input data, the GIPS standards require firms
A. follow certain calculation methodologies.
B. present a minimum of five years of GIPS compliant investment
C. include all actual, fee-paying portfolios in at least one composite defined
by investment strategy.


Which of the following statements is most likely correct regarding compliance
with the GIPS standards?
A. Obtaining verification is not mandatory.
B. The GIPS standards are comprehensive addressing unique characteristics
of each asset class.
C. Compliance with the Code of Ethics and Standards of Professional
Conduct is mandatory.

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CFA Level I Mock Exam 2 – Questions (PM)

Questions 19 to 32 relate to Quantitative Methods

As the degrees of freedom increases, the t-distribution’s:
A. peak becomes flat.
B. tails become more fat.
C. peak becomes narrow.


The mean return of the Blue Enterprises’ stock is 15.5% while standard deviation
is 10.3%. Laura Stone has compiled probability distribution data in an exhibit for
the purposes of analysis. She aims to determine the probability that the stock
return will neither exceed 20.0% nor decline below the mean return.
Standard Normal Probability Distribution Data
x or z
The probability that the stock return will be between the mean return and 20.0% is
closest to:
A. 2%.
B. 17%.
C. 67%.


GR Solutions offers investment plans to its clients. Howard Isaac is one of the
firm’s clients currently invested in GR’s ‘Superior Return Plan’. Isaac will require
funds to construct a house two years from today. The plan promises to pay
$380,000 in six years from today. Given a 10% discount rate, the amount of funds
Isaac should be able to accumulate for the home construction is closest to:
A. $214,500.
B. $259,545.
C. $314,050.

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CFA Level I Mock Exam 2 – Questions (PM)


The interest rate quoted on an investment can be viewed as:
A. opportunity costs of future consumption.
B. the return forgone from current consumption.
C. a sum of the nominal risk-free rate and premiums to compensate for
distinct types of risks.


A distribution that is positively skewed is characterized by:
A. a narrow peak.
B. infrequent extreme gains.
C. a symmetrical shaped distribution curve.


An analyst is calculating the time series mean return for a portfolio allocated 30%
to U.S. equities and 70% to U.S. bonds. He has collected annual return data for
the years 2000 to 2004.
Stock and Bond Return Data 2000-2005
Stocks (%)
Bonds (%)
- 5.6
- 1.1
The time series mean return for the portfolio is closest to:
A. 6.4%.
B. 9.3%.
C. 10.4%.

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CFA Level I Mock Exam 2 – Questions (PM)


Sasha Bayle is analyzing the performance of small-cap stocks in an equity index.
She is forecasting how stocks will perform relative to the previous quarter in
terms of the EPS generated. She performs her analysis using hypothesis testing
and rejects the null hypothesis in favor of the forecast that sample stocks will
generate a higher EPS. Several months later, Bayle discovers that the null
hypothesis was in fact correct and her decision was inaccurate.
Has Bayle committed an error in her statistical analysis?
A. No.
B. Yes, a Type I error.
C. Yes, a Type II error.


Construct Inc. will be undertaking a $30.0 million four-year railroad expansion
project in the current year. In order for the project to be successful, the project
must generate a profit of at least 10% of the initial cost. If the project fails to do
so, the company’s budget committee will reduce allocations to managers for
future projects (budget squeeze). The railroad expansion project estimates that the
project’s net present value may run from $30.5 million on the low end and $35.0
million on the high end, with the probability of either of the two outcomes being
50% and based on a continuous uniform distribution.
Given the above data, the probability of a budget squeeze is closest to:
A. 50.0%.
B. 55.6%.
C. 83.3%.


A strategy that provides a statistically significant positive mean return often:
A. is economically meaningful.
B. factors risk in the decision making process.
C. does not account for transaction costs and taxes.

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CFA Level I Mock Exam 2 – Questions (PM)


An economic analyst has forecasted that inflation is projected to rise in the twenty
developing countries being sampled. The average inflation observed in these
countries in the previous year was 0.0258 while the variance of the average
inflation of the sample countries is 0.013. The analyst will use a reliability factor
of 2.845 for the analysis.
Based on a normal distribution and an unknown population variance, the 90%
confidence interval for the population mean of forecasted inflation is closest to:
A. 0.02609 ± 0.02551.
B. 0.03407 ± 0.01753.
C. 0.03060 ± 0.02100.


A multivariate distribution species probabilities for:
A. two or more related variables.
B. uniformly distributed variables.
C. variables with the same mean and different standard deviations.


The amount of the annual dividend paid by ART Enterprises to its shareholders
depends on the profits available for distribution. There is 30% probability that the
company will generate profits less than $50,000 and pay a dividend per share of
$3 with probability of 15%. There is 70% probability that profits will exceed
$50,000 and the company will pay a dividend per share of $6 with probability of
The expected dividend payment given ART Enterprises generates profits of less
than $50,000 is closest to:
A. $0.135.
B. $0.450.
C. $3.000.


Increasing the sample size:
A. widens the confidence interval.
B. decreases the sample standard error.
C. lowers the precision with which the population parameter is estimated.

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CFA Level I Mock Exam 2 – Questions (PM)


Lance Thackery is an equity analyst at Eve Scott Associates. Thackery is
following the stock of a pharmaceutical. She is attempting to analyze whether the
upcoming launch of a Type-I diabetic drug will be successful and increase the
market price of the pharmaceutical’s share. The probability that the stock price
will increase given a successful drug launch, P (A/S), is 0.35. Thackery has
summarized important forecast probabilities in the exhibit below:
Forecast Probabilities
Probability stock price increases
Probability stock price is unchanged
Probability drug launch is successful
Probability drug launch is unsuccessful


The probability that the stock price increases given that the drug launch is
unsuccessful is closest to:
A. 0.44.
B. 0.52.
C. 0.65.

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CFA Level I Mock Exam 2 – Questions (PM)

Questions 33 to 44 relate to Economics

The difference between partial and general equilibrium analysis is that at least one
of the analysis:
A. ignores exogenous variables.
B. ignores endogenous variables.
C. does not take feedback effects from all markets into consideration.
Correct Answer: C
CFA Level 1, Volume 2, Study Session 4, Reading 13, LOS e
Both partial and general equilibrium analysis take endogenous and exogenous
variables into consideration. However, the difference between the two is that the
former concentrates on one market and does not address the feedback effects from
all other markets.


In a developing country, the real GDP growth rates for 2010 and 2012 were 2%
and 4% respectively. Over the same period, nominal GDP growth rates were 3%
and 5% respectively.
In the time period under analysis, the growth in the economy in real terms was
closest to:
A. 29.1%.
B. 41.4%.
C. 100.0%.


Based on an analysis of a country’s statistics, an economic analyst observes that
economic expansion caused by an increase in aggregate demand has resulted in an
inflationary gap. Based on the economic situation the most appropriate investment
strategy would be to increase investments in:
A. cyclical companies.
B. defensive companies.
C. fixed-income securities.

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CFA Level I Mock Exam 2 – Questions (PM)


Ni-tech is an electric component manufacturer. The exhibit below illustrates sales
revenue, number of components sold, and GDP data for the years 2012 and 2013.

GDP ($ millions)
Quantity sold
Average sales revenue ($ millions)



Based on the data provided, the GDP deflator is closest to:
A. 118.69.
B. 138.89.
C. 139.87.

In a perfectly competitive market, the slope of an individual firm’s demand curve
is most likely:
A. flat.
B. kinked.
C. positive.


Martha Yates is an economic analyst studying the trading activities between Sri
Lanka and the United States with the former exporting tea to the latter and
importing cars. The output per worker per day is summarized in the exhibit
Output per Worker per Day
Tea (grams)
United States
Sri Lanka
Sri Lanka most likely has a (n):
A. absolute advantage in the production of cars.
B. comparative advantage in the production of tea.
C. comparative advantage in the production of cars.

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CFA Level I Mock Exam 2 – Questions (PM)


The following transactions were recorded in a country’s balance of payments
account for the year 2013:

The total profit generated from outsourcing garment manufacturing to
factories amounted to $1.4 billion.
The country’s engineering universities received a total grant of $40
million from overseas donors.
The total amount of equity securities issued amounted to $1.2 billion.
Dividend income generated by citizens amounted to $0.3 billion.
Foreign fixed income holdings transferred to the country’s domestic
institutions by migrants totaled $15 million.
The tourism and travel industry generated revenues of $0.2 billion.

The country’s capital account balance amounts to (in $ billions):
A. 0.015.
B. 1.215.
C. 1.555.

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CFA Level I Mock Exam 2 – Questions (PM)


Sasha Gibbons is an economic analyst who is evaluating the impact of changes in
four factors on Nepal’s economic growth. Gibbons has collected her observations
in the exhibit below:



Observations Concerning Factors
The global price of oil has increased due to
higher demand from industrialized economies.
The relative value of the Nepalese rupee
relative to the dollar (USD/NPR) has
increased in the current year due to a surge in
foreign investments.
The Nepalese authorities have implemented a
regulation mandating enterprises to undertake
production worker training.

Considering each of the factors in isolation, which of the following statements
accurately addresses the impact of the observation on the short-run and long-run
aggregate supply curves?
A. Factor 3 will shift the LRAS and SRAS curves rightward.
B. Factor 2 will not impact the SRAS curve but will shift the LRAS curve
C. Factor 1 will shift the SRAS curve leftward but have no impact on the
SRAS curve.

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CFA Level I Mock Exam 2 – Questions (PM)


Mark Sinatra is a U.S. equity investor with a global investment portfolio.
Sinatra’s portfolio currently comprises of North and European equities. He would
like to expand his portfolio and allocate $0.5 million to Japanese equities.
Information concerning current and expected one-month spot rates is summarized
in an exhibit.
Current and Expected One-Month Spot Rates
Spot Rate
Expected Spot Rate
in One-Month
The expected change in the USD/JPY rate in one month’s time is closest to:
A. – 20.49%.
B. – 0.33%.
C. + 25.35%.


If the amount of money that can be created from an additional deposit of $200 in
a deposit account is $2,500, the money multiplier is closest to:
A. 8.0.
B. 11.5.
C. 12.5.


Industrial equipment will be typically sold in a (n):
A. factor market.
B. goods market.
C. capital market.


A market has reached its equilibrium quantity if the:
A. lowest price buyers are willing to accept is equal to the highest price
sellers are willing to offer.
B. lowest price sellers are willing to offer and the highest price buyers are
willing to accept are equal.
C. highest price buyers are willing to accept is higher than the lowest price
sellers are willing to offer.

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CFA Level I Mock Exam 2 – Questions (PM)

Questions 45 to 68 relate to Financial Reporting and Analysis

Rigid Corp purchased machinery for €45,000 at the beginning of the fiscal year
ending June 30, 2011. At the end of the year, the fair value of the machinery was
€48,000. Rigid Corp has elected to use the revaluation model.
Rigid will record a gain of €3,000 in its income statement if it complies with:
C. neither IFRS nor U.S. GAAP.


A book publisher shipped 40,000 books to its customers during the month of
January. The average price of each book sold was $45 while total cost per book
was $30. Invoice payments are due in 45 days and no cash changes hands at the
point of sale.
Which of the following statements accurately reflects the accounting
consequences of the sales transaction?
A. Net assets will increase by $600,000.
B. Liabilities will increase by $1,800,000.
C. Gross profit will decrease by $1,200,000.


The role of financial reporting is most likely to:
A. provide requisite information to assist analysts in their decision making.
B. evaluate the past, current and potential performance and financial position
of a company.
C. provide information on a company’s financial position, changes in
financial position and performance.


Sources of information which analysts may use besides annual financial
statements and supplementary information most likely include:
A. footnotes.
B. proxy statements.
C. statement of other comprehensive income.

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CFA Level I Mock Exam 2 – Questions (PM)


The market value of one of Thomas Associate’s investments increased by $4,500
and generated interest income of $300. The security is classified as held for
The change in the company’s revenues attributable to the investment is closest to:
A. $300.
B. $4,500.
C. $4,800.


A parcel of land with an original cost of $0.9 million was sold for $1.2 million.
The seller received $0.4 million as down payment with the remainder to be
recovered over a period of eight years. The seller is uncertain about the buyer’s
ability to make the remaining payments.
Using the installment method, the profit recognized by the seller that is
attributable to the down payment is closest to:
A. $0.00 million.
B. $0.10 million.
C. $0.40 million.


The cash generated by a bank as a result of taking deposits will most likely be
classified as a (n):
A. investing cash flow.
B. financing cash flow.
C. operating cash flow.

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CFA Level I Mock Exam 2 – Questions (PM)


On February 15, 2013 Elite Corp purchased 50,000 inventory units at a price of
$20 per unit. Elite subsequently purchased 30,000 units in September at a unit
price of $22 and 40,000 units in November at $25. The number of units sold in
that year was equal to 75,000. Elite uses the LIFO method of inventory
Elite’s closing inventory balance on December 31, 2013 is closest to:
A. $900,000.
B. $1,000,000.
C. $1,110,000.


A security is antidilutive if it:
A. equates the basic EPS to the diluted EPS.
B. decreases the basic EPS relative to the diluted EPS.
C. Improves the wealth of a company’s shareholders.


Oscar Richards is a market analyst serving an economic research firm. He is
attempting to measure the value a small-cap equity stock and has decided to
employ the stock’s purchase price. He believes the fair value measure is
inappropriate due to its lack of objectivity and need for judgment.
Which of the following financial reporting barriers is most likely highlighted by
Richards’ decision to employ historical cost?
A. Valuation
B. Consistency
C. Measurement


Ilkot Inc. is a manufacturer of skiing equipment that has purchased an automated
paint coating unit for $600,000. The unit has an estimated useful life of eight
years and a residual value of $10,000.
Using the double declining balance method, the unit’s net book value in the
second year of its useful life is closest to:
A. $184,375.
B. $187,500.
C. $337,500.

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CFA Level I Mock Exam 2 – Questions (PM)


In 2008 THC Manufacturers started business by purchasing 35,000 units at a unit
price of $55 and sold 23,000 units at a unit price of $60. In 2009 the company
purchased 5,500 units at a price of $58 and sold 13,500 at a price of $75. THS
Manufacturers complies with U.S. GAAP and applies the FIFO method of
inventory accounting.
In 2009 THS will report an ending inventory balance of:
A. $87,000.
B. $220,000.
C. $232,000.


In 2009 a portion of LRV Corp.’s inventory had a carrying value of $0.7 million.
The inventory was originally purchased at a total cost of $1.1 million. The cost to
replace these units has been estimated at $0.8 million. The net realizable value is
$0.9 million and should the company decide to sell the inventory it should earn an
estimated dollar profit margin of $4,250. LRV prepares and presents its financial
statements in accordance with U.S. GAAP.
In its 2011 balance sheet, LRV’s inventory will be reported at a value closest to:
A. $700,000.
B. $895,750.
C. $900,000.


Intangible assets with perpetual lives are most likely:
A. depreciated.
B. amortized but not tested for impairment.
C. tested annually for impairment but not amortized.

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CFA Level I Mock Exam 2 – Questions (PM)


In 2009, Aero Inc began commercial production by purchasing 100,000 units of
inventory at a unit price of $55. In the same year Aero sold 80,000 units at a price
of $70. The following year the company purchased 65,000 units at a unit price of
$60 and sold 60,000 units at a unit price of $75. Aero applies the weighted
average method of inventory accounting.
The cost of sales reported in 2010 is closest to:
A. $2.6 million.
B. $3.5 million.
C. $4.2 million.


If inventory unit costs are rising and inventory quantities are constant, which
inventory accounting method will result in the highest reported taxable income?
C. Weighted average cost

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CFA Level I Mock Exam 2 – Questions (PM)


On March 1, 2010 Tecnox, a chip processor, purchased a manufacturing unit to be
used in its production process. Depreciation charges are applied in full in the year
of purchase. Details relevant to the unit purchased are summarized in the exhibit
Manufacturing Unit Details
Original cost
Residual value
Estimated useful life
Total estimated productive capacity

Production in each year (number of chips)

Applicable depreciation method

5 years
1,000 chips
2010: 280
2011: 450
2012: 120
2013: 100
2014: 50

The accumulated depreciation expense in 2011 is closest to:
A. $65.6 million.
B. $70.1 million.
C. $99.3 million.

Which of the following associated costs will least likely be capitalized as part of
an automated paint mixing unit?
A. Training staff on how to maintain the unit.
B. Installation and testing of the machine’s operations.
C. Replacing the factory’s lighting system to allow for the unit to operate.

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CFA Level I Mock Exam 2 – Questions (PM)


On March 1, 2013 a customer subscribed to a monthly newsletter paying an
annual fee of $1,440 on that day. The news agency’s financial year ends on
December 31, 2013.
The adjustment required to the company’s liabilities with respect to the specific
transaction at year-end is closest to:
A. $0.
B. $240.
C. $1,200.


A book publishing firm gained the right to use a patent as a result of acquiring a
How will the patent be accounted for by the firm? The patent will be:
A. accounted for using the cost model.
B. recognized if it meets certain pre-specified criteria.
C. allocated a share of the acquisition price on the basis of the asset’s fair


Utah Corp is a designer of home lighting systems and accessories. In 2012, Utah
expanded its production by converting a vacant property into a factory; the
property was being held by the company as investment property. Prior to the
conversion, the property’s fair value was €150,000. The original purchase price of
the property was €120,000. Utah prepares and presents its financial statements in
accordance with IFRS.
In response to the change in classification, Utah will:
A. make no accounting adjustments.
B. record a gain of €30,000 in its income statement.
C. revalue the value of the property upwards by $30,000 in its balance sheet.

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CFA Level I Mock Exam 2 – Questions (PM)


Sash Imperial has undertaken a contract to build a railroad line. The project will
take three years to complete and Sash is expected to receive $40.00 million on
completion. Total project costs are estimated at $31 million. At the end of the first
year Sash has spent $12.00 million and expects to incur a total loss of $0.50
million over the remaining project term. Sash complies with U.S. GAAP.
The amount recognized by Sash in its income statement at the end of Year 1, in
relation to the project, is closest to:
A. $2.98 million.
B. $3.48 million.
C. $15.48 million.


Which of the following properties will most likely fit the definition of investment
property according to IFRS?
A. An office building used solely for administrative purposes.
B. Company housing units provided to employees free of cost.
C. A vacant factory plant that is leased to a manufacturing firm.


U.S GAAP requires software development costs to be:
A. expensed as incurred.
B. expensed if they relate to software to be developed for internal use.
C. capitalized once the saleable product’s technological feasibility has been

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