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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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March 22

By Kaplan Schweser | Posted on March 22, 2017


Answer to Level I Question: A

Answer Explanation: The answer was derived based on the following lower of cost-or-market calculation:

Ending Inventory  200 + 100 - 80 = 220 units

Lower of cost-or-market = $60/unit

220 x $60  $13,200

Choice "b" is incorrect.  This answer incorrectly valued the ending inventory at $80/unit and did not recognize the current drop in widget values.

Choice "c" is incorrect.  The LIFO method was applied.

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March 21

By Kaplan Schweser | Posted on March 21, 2017


Answer to Level I Question: A

Answer Explanation: Because IFRS is based on the principle of conservatism, inventory losses (write-downs) must be recognized immediately on the financial statements, whereas inventory gains are recognized only when an inventory item is actually sold.

Choice "b" is incorrect.  This statement is inconsistent with the principle of conservatism.

Choice "c" is incorrect.  IFRS requires the immediate recognition of inventory losses.

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March 20

By Kaplan Schweser | Posted on March 20, 2017


Answer to Level I Question: C

Answer Explanation: Both IFRS and U.S. GAAP require that the lower of cost or market basis be applied to inventory.  Note that market is generally defined as replacement cost under U.S. GAAP, and net realizable value under IFRS.

Choice "a" is incorrect.  Lower of cost or market valuation is specific to inventory accounting.  Fixed assets are generally reported at historical cost less accumulated depreciation, unless it has been determined that the…

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March 19

By Kaplan Schweser | Posted on March 19, 2017


Answer to Level I Question: C

Answer Explanation: Because IFRS requires the lower of cost or net realizable value when reporting inventory, the company must recognize a $50,000 unrealized loss ($550,000  $600,000) on the income statement for 20X2.  When the inventory is sold in 20X3, profit of $70,000 ($620,000  $550,000) is recognized on the income statement.

Choice "a" is incorrect.  The fact that the inventory was sold for $620,000 in 20X3 has no impact on the inventory…

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March 18

By Kaplan Schweser | Posted on March 18, 2017


Answer to Level I Question: A

Answer Explanation: FIFO will produce the highest reported inventory because the most recent items purchased or produced are applied to ending inventory during a period of rising prices.

Choice "b" is incorrect.  LIFO will result in the lowest reported ending inventory during a period of rising prices, since the most recent items purchased or produced are applied to cost of goods sold.

Choice "c" is incorrect.  The average cost method will result in…

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March 17

By Kaplan Schweser | Posted on March 17, 2017


Answer to Level I Question: B

Answer Explanation: Under FIFO, the first units produced are the first items to be sold.  In an inflationary environment, this will result in lower cost of goods sold and higher net income.

Choice "a" is incorrect.  In an inflationary environment, the U.S. GAAP LIFO method would result in a higher cost of goods sold and lower reported net income.

Choice "c" is incorrect.  The average-cost method is based on the average of all inventory costs, which…

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March 16

By Kaplan Schweser | Posted on March 16, 2017


Answer to Level I Question: B

Answer Explanation: When the FIFO cost flow assumption is used, the earliest units of inventory purchased flow to cost of goods sold, and the most recent purchases are accumulated in ending inventory.

Choice "a" is incorrect.  Reductions in inventory are a source of cash and are shown as an addition to net income in the operating activities section of the statement of cash flows when calculating cash flow from operations using the indirect…

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March 15

By Kaplan Schweser | Posted on March 15, 2017


Answer to Level I Question: C

Answer Explanation: Changing from bartering to monetary payment should not alter reported revenue because the bartered services would be recorded at their fair value.  

Choice "a" is incorrect.  In barter transactions, companies value services based on the prices they would normally charge, not based on the value of what they received.  (These values should be identical in a fair exchange.)

Choice "b" is incorrect.  Revenue would have been recorded…

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March 14

By Kaplan Schweser | Posted on March 14, 2017


Answer to Level I Question: A

Answer Explanation: A lower cost amount deducted from revenue will result in a higher gross profit margin and ultimately higher taxable net income.

Choice "b" is incorrect.  FIFO costing uses older and cheaper inventory (assuming inflationary prices) in determining the cost of goods sold.  This results in a higher pretax income being exposed to the effective tax rate.  The higher taxes are a cash outflow.  LIFO would result in higher cost of goods…

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March 13

By Kaplan Schweser | Posted on March 13, 2017


Answer to Level I Question: B

Answer Explanation: Choice "b" is correct.  Using the FIFO inventory method in a period of rising prices results in lower cost of goods sold, resulting in higher net income.  It also results in a higher inventory balance as the most recent inventory is maintained on the balance sheet.

Choices "a" and "c" are incorrect.  FIFO in a period of rising prices means higher inventory balances on the balance sheet and lower cost of goods sold on the income…

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March 12

By Kaplan Schweser | Posted on March 12, 2017


Answer to Level I Question: C

Answer Explanation: Because the percentage-of-completion method reports lower liabilities and higher net worth, the debt-to-equity ratio will be lower.

Choice "b" is incorrect.  Because the periodic earnings will be higher under the percentage-of-completion method, the return on assets ratio will be higher.

Choice "a" is incorrect.  The asset turnover ratio is higher under the percentage-of-completion method because sales are reported during the…

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March 11

By Kaplan Schweser | Posted on March 11, 2017


Answer to Level I Question: A

Answer Explanation: The installment method is used when there is significant doubt as to the collection of the sales price.  This method ties the recognition of revenues and gross profit to the actual cash received from the customer in an accounting period as a percentage of the total revenues to be collected on the sale.  In this case, the total gross profit on the sale is $1,300,000 ($4,500,000 - $3,200,000).  However, because only 20% ($900,000 /…

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March 10

By Kaplan Schweser | Posted on March 10, 2017


Answer to Level I Question: A

Answer Explanation: The profit on the down payment under the installment method is based on the ratio of profit to sales value.  The profit on the building sale is $5 million ($15 million - $10 million), and the ratio of profit to sales is 33.3% ($5 million / $15 million).  Applying this ratio to the down payment of $3 million, the profit recorded is $1 million ($3 million x 33.3%).

Choice "b" is incorrect.  The profit to sales ratio is incorrectly…

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March 9

By Kaplan Schweser | Posted on March 09, 2017


Answer to Level I Question: B

Answer Explanation: Investors are only compensated for incurring systematic risk.  Of Asset X's total risk of 20%, 10% is systematic and 10% is unsystematic.  Since 90% of Asset Y's risk is systematic, this means that its systemic risk is 9%.  Therefore, Asset Y will have a lower expected return, since its systematic risk is lower than that of Asset X.

Choice "a" is incorrect.  Asset X has a higher level of systematic risk than Asset Y, which means…

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March 8

By Kaplan Schweser | Posted on March 08, 2017


Answer to Level I Question: B

Answer Explanation: Systematic risk is present in the market as a whole.  Because it cannot be further reduced by diversification, systematic risk will be priced and investors must be adequately compensated for taking on this risk.

Choice "a" is incorrect.  Total risk can be decomposed into systematic risk and nonsystematic risk.  Nonsystematic risk can be diversified away and investors will not receive any return for accepting this risk.

Choice "c"…

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March 7

By Kaplan Schweser | Posted on March 07, 2017


Answer to Level I Question: C

Answer Explanation: The total risk of an investment can be decomposed into its systematic risk and nonsystematic risk.  Systematic risk is the risk present in the market as a whole and cannot be diversified.  Nonsystematic risk is the risk inherent to one company or industry, and is frequently referred to as idiosyncratic risk.

Choice "a" is incorrect.  The total risk of an investment can be decomposed into its systematic risk and nonsystematic risk. …

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March 6

By Kaplan Schweser | Posted on March 06, 2017


Answer to Level I Question: A

Answer Explanation: A product failure would adversely affect one company (or one industry) which accurately characterizes nonsystematic risk.

Choice "b" is incorrect.  A large earthquake is a natural disaster which will likely adversely affect multiple companies in a variety of industries.  Since this event is a risk which cannot be avoided, a large earthquake would be an example of systematic risk.

Choice "c" is incorrect.  A government revolution…

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By Kaplan Schweser | Posted on January 16, 2017 | Read Article


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By Kaplan Schweser | Posted on January 15, 2017 | Read Article


January 14

By Kaplan Schweser | Posted on January 14, 2017 | Read Article


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By Kaplan Schweser | Posted on January 13, 2017 | Read Article


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By Kaplan Schweser | Posted on January 12, 2017 | Read Article


January 11

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By Kaplan Schweser | Posted on January 10, 2017 | Read Article


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By Kaplan Schweser | Posted on January 06, 2017 | Read Article


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


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


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


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


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


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


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


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


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


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


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


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