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CFA® Level II Question of the Day

CFA® Level II 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 II Question of the Day emails.

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February 24

By Kaplan Schweser | Posted on February 24, 2017


Answer to Level II Question A

Answer Explanation: Relative strength indicators compare a stock's performance over some period with either an index or with its own past performance.

Choice "b" is incorrect.  Earnings surprise (unexpected earnings) equals the actual less expected earnings in a period.  Earnings surprise does not compare the performance of a stock to an index.

Choice "c" is incorrect.  Standardized unexpected earnings (SUE) is unexpected earnings (earnings…

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February 23

By Kaplan Schweser | Posted on February 23, 2017


Answer to Level II Question B

Answer Explanation: The disallowance of QSPE's will force companies to consolidate SPEs used to securitize assets.  As a result, the analyst reviewing EKA's balance sheet may choose to consolidate the QSPE by adding the loans receivable held by the SPE to EKA's total assets and increasing total liabilities by the amount borrowed by the SPE in order to finance the purchase of the loans.  As a result of the consolidation, EKA will have higher total assets…

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February 22

By Kaplan Schweser | Posted on February 22, 2017


Answer to Level II Question C

Answer Explanation: When a lease is accounted for as an operating lease, each lease payment is recorded as rent expense and is treated as an operating cash outflow.  Under capital lease accounting, each lease payment is divided into a principal portion that reduces the liability on the balance sheet (a financing cash outflow) and an interest portion that is recorded on the income statement (a operating cash outflow).  As a result, cash outflows from…

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February 21

By Kaplan Schweser | Posted on February 21, 2017


Answer to Level II Question A

Answer Explanation: The adjustments to capitalize an operating lease will most likely incorporate higher assets and liabilities to account for the capitalized asset and the liability associated with the lease obligation.  The financial leverage ratio is calculated as assets divided by equity, and with a large increase in assets, this will increase the financial leverage ratio.  In addition, the increase in debt will result in a higher debt-to-equity…

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February 20

By Kaplan Schweser | Posted on February 20, 2017


Answer to Level II Question A

Answer Explanation: Analysts hoping to make valid comparisons would necessarily have to evaluate the relative performance of each firm's faucet line.  The Du Pont model allows analysts to view the components of profitability, leverage, and efficiency of the faucet lines for each firm.

Choice "b" is incorrect.  Financial statement comparisons are a good place to start but would be an incomplete analysis of the components of the quality of the faucet…

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February 19

By Kaplan Schweser | Posted on February 19, 2017


Answer to Level II Question C

Answer Explanation: A company which has income from affiliates will show a higher return on equity as a result of the equity in affiliate earnings included in net income.  ABLE's net income should be reduced in order to accurately compare the two companies. 

Choice "a" is incorrect.  Any adjustments should be made to ABLE, not to BAKER.  In addition, increasing the assets (and thus decreasing BAKER's total asset turnover) would be the appropriate…

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February 18

By Kaplan Schweser | Posted on February 18, 2017


Answer to Level II Question C

Answer Explanation: The numerator (sales) will not change while the denominator (total assets) will be reduced when the analyst makes adjustments to review Cardin's core business.  Therefore, the overall ratio will increase. 

Choice "a" is incorrect.  The net profit margin will decrease as the numerator (net income) will decrease as a result of excluding the equity in earnings from the associate, while the denominator (sales) will remain the…

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February 17

By Kaplan Schweser | Posted on February 17, 2017


Answer to Level II Question C

Answer Explanation: Cash flow and earnings can be compared by adding interest paid and taxes paid back to operating cash flow to enable a comparison of EBIT and operating cash flow before interest and taxes.

Choice "a" is incorrect.  Depreciation expense is added back to net income to compute operating cash flow under the indirect method.  An analyst does not need to make this adjustment to compare cash flow and earnings.

Choice "b" is incorrect. …

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February 16

By Kaplan Schweser | Posted on February 16, 2017


Answer to Level II Question B

Answer Explanation: To make Noloan comparable to Noloss, the analyst must consolidate the off-balance sheet special purpose entity, increasing Noloan's assets and liabilities.  The adjustment will increase Noloan's leverage ratio and percentage of capital attributable to liabilities.  For Noloss, the analyst will MOST LIKELY increase the allowance for loan losses, which will decrease the asset and decrease equity.      

Choice "a" is incorrect.  The…

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February 15

By Kaplan Schweser | Posted on February 15, 2017


Answer to Level II Question: A

Answer Explanation: Rent expense signifies operating leases, which are off-balance sheet transactions.  No assets or liabilities related to the leases appear on the balance sheet, which means debt and leverage ratios will appear more favorable for the company with the operating leases.  In order to properly compare the two companies, the analyst should adjust Company A's operating leases so that they are reflected as capital leases.  This will increase…

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February 14

By Kaplan Schweser | Posted on February 14, 2017


Answer to Level II Question: A

Answer Explanation: This represents an off-balance sheet liability that should be put on-balance sheet by the analyst to reflect the true financial position (economic reality) of a company.  This represents a non-GAAP adjustment.

Choices "b" and "c" are incorrect.  Each represents an obligation that is already reflected on the balance sheet of the parent company.

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February 13

By Kaplan Schweser | Posted on February 13, 2017


Answer to Level II Question: B

Answer Explanation: Communicating with management is considered part of the collection phase of the framework.    

Choice "a" is incorrect.  The rationale for why the data is being collected would be defined and established in the first phase, "define the purpose and context of the analysis." 

Choice "c" is incorrect.  Adjustments made to the financial data would be made after the collection phase is complete.

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February 12

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


February 11

By Kaplan Schweser | Posted on February 11, 2017 | Read Article


February 10

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


February 9

By Kaplan Schweser | Posted on February 09, 2017 | Read Article


February 8

By Kaplan Schweser | Posted on February 08, 2017 | Read Article


February 7

By Kaplan Schweser | Posted on February 07, 2017 | Read Article


February 6

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


February 5

By Kaplan Schweser | Posted on February 05, 2017 | Read Article


February 4

By Kaplan Schweser | Posted on February 04, 2017 | Read Article


February 3

By Kaplan Schweser | Posted on February 03, 2017 | Read Article


February 2

By Kaplan Schweser | Posted on February 02, 2017 | Read Article


February 1

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


January 31

By Kaplan Schweser | Posted on January 31, 2017 | Read Article


January 30

By Kaplan Schweser | Posted on January 30, 2017 | Read Article


January 29

By Kaplan Schweser | Posted on January 29, 2017 | Read Article


January 28

By Kaplan Schweser | Posted on January 28, 2017 | Read Article


January 27

By Kaplan Schweser | Posted on January 27, 2017 | Read Article


January 26

By Kaplan Schweser | Posted on January 26, 2017 | Read Article


January 25

By Kaplan Schweser | Posted on January 25, 2017 | Read Article


January 24

By Kaplan Schweser | Posted on January 24, 2017 | Read Article


January 23

By Kaplan Schweser | Posted on January 23, 2017 | Read Article


January 22

By Kaplan Schweser | Posted on January 22, 2017 | Read Article


January 21

By Kaplan Schweser | Posted on January 21, 2017 | Read Article


January 20

By Kaplan Schweser | Posted on January 20, 2017 | Read Article


January 19

By Kaplan Schweser | Posted on January 19, 2017 | Read Article


January 18

By Kaplan Schweser | Posted on January 18, 2017 | Read Article


January 17

By Kaplan Schweser | Posted on January 17, 2017 | Read Article


January 16

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


January 15

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


January 14

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


January 13

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


January 12

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


January 11

By Kaplan Schweser | Posted on January 11, 2017 | Read Article


January 10

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


January 9

By Kaplan Schweser | Posted on January 09, 2017 | Read Article


January 8

By Kaplan Schweser | Posted on January 08, 2017 | Read Article


January 7

By Kaplan Schweser | Posted on January 07, 2017 | Read Article


January 6

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


January 5

By Kaplan Schweser | Posted on January 05, 2017 | Read Article


January 4

By Kaplan Schweser | Posted on January 04, 2017 | Read Article


January 3

By Kaplan Schweser | Posted on January 03, 2017 | Read Article


January 2

By Kaplan Schweser | Posted on January 02, 2017 | Read Article


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