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CFA® Level I Question of the Day

CFA® Level I Question of the Day

Kaplan Schweser's CFA® Question of the Day begins in October 2016 and runs through Exam Day. Below you will find the answers for our Level I Question of the Day emails.

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January 17

By Kaplan Schweser | Posted on January 17, 2017


Answer to Level I Question: B

Answer Explanation: Receivables will increase assuming the recognized revenue is on credit.  When the revenue is recognized, cost of goods sold will increase and inventories will decrease.

Choice "a" is incorrect.  While recognizing revenue faster than justified would likely overstate accounts receivable, inventory would be understated due to the increase in cost of goods sold.

Choice "c" is incorrect.  Accounts receivable would likely be overstated…

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January 16

By Kaplan Schweser | Posted on January 16, 2017


Answer to Level I Question: B

Answer Explanation: Recognizing revenue faster than justified normally overstates accounts receivable (revenue is earned but payment has not yet been received) and overstates retained earnings (because revenue through its contribution to net income ends up in retained earnings).

Choice "a" is incorrect.  While recognizing revenue faster than justified would likely overstate accounts receivable, retained earnings would be overstated (rather than…

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January 15

By Kaplan Schweser | Posted on January 15, 2017


Answer to Level I Question: C

Answer Explanation: Revenue must be both realized(or realizable) and earned to be recognized (i.e., reported on the income statement).  Realized refers to reasonable assurance that payment will be received.  Earned refers to a product being delivered or a service rendered.  There are, of course, exceptions to this general rule where revenue can be recognized before being fully earned (e.g., percentage-of-completion method).

Choice "b" is incorrect. …

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January 14

By Kaplan Schweser | Posted on January 14, 2017


Answer to Level I Question: B

Answer Explanation: The use of the percentage-of-completion method will recognize both revenue and expenses over the life of the project.  This creates less earnings variability than the completed contract method, which recognizes all revenue and expenses after the project is complete.

Choice "a" is incorrect.  Both methods require that estimated losses be recognized immediately, rather than at completion of the contract.

Choice "c" is incorrect. …

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January 13

By Kaplan Schweser | Posted on January 13, 2017


Answer to Level I Question: C

Answer Explanation: All of the terms of the sale are not satisfied until the promotional material is supplied.

Choice "a" is incorrect.  Returns need not be estimated; they can be accounted for when they occur.

Choice "b" is incorrect.  Enforcing agreements does not block recognition of revenue.

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January 12

By Kaplan Schweser | Posted on January 12, 2017


Answer to Level I Question: C

Answer Explanation: Under the cost recovery method, cash receipts are treated first as a recovery of seller costs; subsequent collections of cash are recognized as income.  The cost recovery method is used when there is uncertainty about estimates of the remaining costs to complete the sale.  An example would be a situation where the seller has an obligation to perform certain services or make modifications to the product sold at the request of the…

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January 11

By Kaplan Schweser | Posted on January 11, 2017


Answer to Level I Question: B

Answer Explanation: Interest expense relating to long term debt will be listed below the operating income line.  Items relating to capital structure, such as long term debt, are not related to how the company conducts its daily activities (operations) and so are listed below the operating line.

Choice "a" is incorrect.  Interest expense on long term debt relates to capital structure and will be listed below the operating line.  For some financial…

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January 10

By Kaplan Schweser | Posted on January 10, 2017


Answer to Level I Question: B

Answer Explanation: Cost of goods sold is an operating expense that, when subtracted from net sales, is used to determine a company's gross profit.

Choice "a" is incorrect.  Interest expense is a non-operating expense that is associated with debt financing.

Choice "c" is incorrect.  Selling, general, and administrative (SG&A) expense is an operating expense that is shown below gross profit on the income statement.

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January 9

By Kaplan Schweser | Posted on January 09, 2017


Answer to Level I Question: C

Answer Explanation: The income (loss) from discontinued operations is considered a "below the line" item, with “the line” referring to income from continuing operations.  Therefore, the income (loss) from discontinued operations is reported net of the related tax effects.  This is sometimes referred to as an "intraperiod" tax allocation. 

Choice "a" is incorrect.  Operating income is not all income earned by the company before taking income taxes into…

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January 8

By Kaplan Schweser | Posted on January 08, 2017


Answer to Level I Question: B

Answer Explanation: Factory overhead is included in cost of goods sold because it is directly tied to the production of goods and getting them ready for sale.

Choice "c" is incorrect.  Sales force compensation is an expense that is not directly associated with the production of goods.

Choice "a" is incorrect.  Marketing costs are also not directly associated with the production of goods.

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January 7

By Kaplan Schweser | Posted on January 07, 2017


Answer to Level I Question: C

 

Answer Explanation: Sales minus cost of goods sold equals gross profit.

Choice "a" is incorrect.  A realized holding gain pertains only to changes in prices related to cost of goods sold.

Choice "b" is incorrect.  Although operating profit includes sales less cost of goods sold, it also includes the impact of other operating expenses such as selling, general and administrative expenses.

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January 6

By Kaplan Schweser | Posted on January 06, 2017


Answer to Level I Question: C

Answer Explanation: The internal rate of return (IRR) is the discount rate that will equate the present value of the cash flows generated from a project to the present value of the cash outlays required for a project.  Thus, it is the rate that, when used, results in the net present value being equal to zero.

Choice "a" is incorrect.  The reciprocal of the discounted payback period is not a meaningful result.

Choice "b" is incorrect.  This is…

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January 5

By Kaplan Schweser | Posted on January 05, 2017


Answer to Level I Question: C

Answer Explanation: Both the payback period and the discounted payback period methods measure how long it takes the firm to get back the initial investment, although the discounted payback period method does so in terms of the present value of the cash flows.

Choice "a" is incorrect.  The payback period method is not better than discounted payback period method at indicating project liquidity.  Project liquidity is implied by both because projects…

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January 4

By Kaplan Schweser | Posted on January 04, 2017


Answer to Level I Question: C

 

Answer Explanation: This project would be considered significantly more risky than the firm's usual projects (supplying components for existing products).  As such, the appropriate discount rate would be higher than the firm's WACC.  The WACC plus a project specific risk premium would be used.

Choice "a" is incorrect.  By applying the firm's WACC to the estimated cash flows of a proposed investment, the firm inherently assumes that the project's…

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January 3

By Kaplan Schweser | Posted on January 03, 2017


Answer to Level I Question: C

Answer Explanation: Opportunity costs are relevant cash flows and should be included in a project's incremental cash flow.

Choice "a" is incorrect.  Shipping and installation costs should be included as part of the incremental cash flows of projects.  They are relevant cash flows.

Choice "b" is incorrect.  The cost of capital used in capital budgeting should be a weighted average cost of capital to the firm, plus or minus a risk premium that depends…

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January 2

By Kaplan Schweser | Posted on January 02, 2017


Answer to Level I Question: C

 

Answer Explanation: Opportunity costs are included when measuring the incremental free cash flows of the project.

Choice "a" is incorrect.  The cost of capital used in capital budgeting should be a weighted-average cost of capital to the firm, plus or minus a risk premium that depends upon the riskiness of the project relative to the riskiness of the firm's existing operations.

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January 1

By Kaplan Schweser | Posted on January 01, 2017 | Read Article


December 31

By Kaplan Schweser | Posted on December 31, 2016 | Read Article


December 30

By Kaplan Schweser | Posted on December 30, 2016 | Read Article


December 29

By Kaplan Schweser | Posted on December 29, 2016 | Read Article


December 28

By Kaplan Schweser | Posted on December 28, 2016 | Read Article


December 27

By Kaplan Schweser | Posted on December 27, 2016 | Read Article


December 26

By Kaplan Schweser | Posted on December 26, 2016 | Read Article


December 25

By Kaplan Schweser | Posted on December 25, 2016 | Read Article


December 24

By Kaplan Schweser | Posted on December 24, 2016 | Read Article


December 23

By Kaplan Schweser | Posted on December 23, 2016 | Read Article


December 22

By Kaplan Schweser | Posted on December 22, 2016 | Read Article


December 21

By Kaplan Schweser | Posted on December 21, 2016 | Read Article


December 20

By Kaplan Schweser | Posted on December 20, 2016 | Read Article


December 19

By Kaplan Schweser | Posted on December 19, 2016 | Read Article


December 18

By Kaplan Schweser | Posted on December 18, 2016 | Read Article


December 17

By Kaplan Schweser | Posted on December 17, 2016 | Read Article


December 16

By Kaplan Schweser | Posted on December 16, 2016 | Read Article


December 15

By Kaplan Schweser | Posted on December 15, 2016 | Read Article


December 14

By Kaplan Schweser | Posted on December 14, 2016 | Read Article


December 13

By Kaplan Schweser | Posted on December 13, 2016 | Read Article


December 12

By Kaplan Schweser | Posted on December 12, 2016 | Read Article


December 11

By Kaplan Schweser | Posted on December 11, 2016 | Read Article


December 10

By Kaplan Schweser | Posted on December 10, 2016 | Read Article


December 9

By Kaplan Schweser | Posted on December 09, 2016 | Read Article


December 8

By Kaplan Schweser | Posted on December 08, 2016 | Read Article


December 7

By Kaplan Schweser | Posted on December 07, 2016 | Read Article


December 6

By Kaplan Schweser | Posted on December 06, 2016 | Read Article


December 5

By Kaplan Schweser | Posted on December 05, 2016 | Read Article


December 4

By Kaplan Schweser | Posted on December 04, 2016 | Read Article


December 3

By Kaplan Schweser | Posted on December 03, 2016 | Read Article


December 2

By Kaplan Schweser | Posted on December 02, 2016 | Read Article


December 1

By Kaplan Schweser | Posted on December 01, 2016 | Read Article


November 30

By Kaplan Schweser | Posted on November 30, 2016 | Read Article


November 29

By Kaplan Schweser | Posted on November 29, 2016 | Read Article


November 28

By Kaplan Schweser | Posted on November 28, 2016 | Read Article


November 27

By Kaplan Schweser | Posted on November 27, 2016 | Read Article


November 26

By Kaplan Schweser | Posted on November 26, 2016 | Read Article


November 25

By Kaplan Schweser | Posted on November 25, 2016 | Read Article


November 24

By Kaplan Schweser | Posted on November 24, 2016 | Read Article


November 23

By Kaplan Schweser | Posted on November 23, 2016 | Read Article


November 22

By Kaplan Schweser | Posted on November 22, 2016 | Read Article


November 21

By Kaplan Schweser | Posted on November 21, 2016 | Read Article


November 20

By Kaplan Schweser | Posted on November 20, 2016 | Read Article


November 19

By Kaplan Schweser | Posted on November 19, 2016 | Read Article


November 18

By Kaplan Schweser | Posted on November 18, 2016 | Read Article


November 17

By Kaplan Schweser | Posted on November 17, 2016 | Read Article


November 16

By Kaplan Schweser | Posted on November 16, 2016 | Read Article


November 15

By Kaplan Schweser | Posted on November 15, 2016 | Read Article


November 14

By Kaplan Schweser | Posted on November 14, 2016 | Read Article


November 13

By Kaplan Schweser | Posted on November 13, 2016 | Read Article


November 12

By Kaplan Schweser | Posted on November 12, 2016 | Read Article


November 11

By Kaplan Schweser | Posted on November 11, 2016 | Read Article


November 10

By Kaplan Schweser | Posted on November 10, 2016 | Read Article


November 9

By Kaplan Schweser | Posted on November 09, 2016 | Read Article


November 8

By Kaplan Schweser | Posted on November 08, 2016 | Read Article


November 7

By Kaplan Schweser | Posted on November 07, 2016 | Read Article


November 6

By Kaplan Schweser | Posted on November 06, 2016 | Read Article


November 5

By Kaplan Schweser | Posted on November 05, 2016 | Read Article


November 4

By Kaplan Schweser | Posted on November 04, 2016 | Read Article


November 3

By Kaplan Schweser | Posted on November 03, 2016 | Read Article


November 2

By Kaplan Schweser | Posted on November 02, 2016 | Read Article


November 1

By Kaplan Schweser | Posted on November 01, 2016 | Read Article


October 31

By Kaplan Schweser | Posted on October 31, 2016 | Read Article


October 30

By Kaplan Schweser | Posted on October 30, 2016 | Read Article


October 29

By Kaplan Schweser | Posted on October 29, 2016 | Read Article


October 28

By Kaplan Schweser | Posted on October 28, 2016 | Read Article


October 27

By Kaplan Schweser | Posted on October 27, 2016 | Read Article


October 26

By Kaplan Schweser | Posted on October 26, 2016 | Read Article


October 25

By Kaplan Schweser | Posted on October 25, 2016 | Read Article


October 24

By Kaplan Schweser | Posted on October 24, 2016 | Read Article


October 23

By Kaplan Schweser | Posted on October 23, 2016 | Read Article


October 22

By Kaplan Schweser | Posted on October 22, 2016 | Read Article


October 21

By Kaplan Schweser | Posted on October 21, 2016 | Read Article


October 20

By Kaplan Schweser | Posted on October 20, 2016 | Read Article


October 19

By Kaplan Schweser | Posted on October 19, 2016 | Read Article


October 18

By Kaplan Schweser | Posted on October 18, 2016 | Read Article


October 17

By Kaplan Schweser | Posted on October 17, 2016 | Read Article


October 16

By Kaplan Schweser | Posted on October 16, 2016 | Read Article


October 15

By Kaplan Schweser | Posted on October 16, 2016 | Read Article


October 14

By Kaplan Schweser | Posted on October 14, 2016 | Read Article


October 13

By Kaplan Schweser | Posted on October 13, 2016 | Read Article


October 12

By Kaplan Schweser | Posted on October 12, 2016 | Read Article


October 11

By Kaplan Schweser | Posted on October 11, 2016 | Read Article


October 10

By Kaplan Schweser | Posted on October 10, 2016 | Read Article


October 9

By Kaplan Schweser | Posted on October 09, 2016 | Read Article


October 8

By Kaplan Schweser | Posted on October 08, 2016 | Read Article


October 7

By Kaplan Schweser | Posted on October 07, 2016 | Read Article


October 6

By Kaplan Schweser | Posted on October 06, 2016 | Read Article


October 5

Posted on October 05, 2016 | Read Article


October 4

By Kaplan Schweser | Posted on October 04, 2016 | Read Article


October 3

By Kaplan Schweser | Posted on October 03, 2016 | Read Article


October 2

By Kaplan Schweser | Posted on October 02, 2016 | Read Article


October 1

By Kaplan Schweser | Posted on October 01, 2016 | Read Article


September 30

By Kaplan Schweser | Posted on September 30, 2016 | Read Article


September 29

By Kaplan Schweser | Posted on September 29, 2016 | Read Article


September 28

By Kaplan Schweser | Posted on September 28, 2016 | Read Article


September 27

By Kaplan Schweser | Posted on September 27, 2016 | Read Article


September 26

By Kaplan Schweser | Posted on September 26, 2016 | Read Article


September 25

By Kaplan Schweser | Posted on September 25, 2016 | Read Article


September 24

By Kaplan Schweser | Posted on September 24, 2016 | Read Article