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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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March 22

By Kaplan Schweser | Posted on March 22, 2017


Answer to Level II Question: B

Answer Explanation: In an increasing price environment, FIFO will result in lower cost of goods sold, higher operating (net) income and higher inventory (asset) balances.  This will lead to a higher operating margin.  The higher inventory (asset) balance will generate a lower asset turnover ratio due to the higher asset base from the FIFO method.

Choices "a" and "c" are incorrect.  FIFO will result in a lower cost of goods sold and therefore, a…

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March 21

By Kaplan Schweser | Posted on March 21, 2017


Answer to Level II Question: C

Answer Explanation: In a deflationary pricing environment, the use of LIFO will result in lower cost of goods sold, higher pretax income, higher taxes and lower after-tax cash flow (resulting from the higher taxes).

Choice "a" is incorrect.  This describes the financial statement impact when LIFO is used in a rising price environment.

Choice "b" is incorrect.  Although cash flow would be lower with the use of LIFO in a declining price environment,…

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March 20

By Kaplan Schweser | Posted on March 20, 2017


Answer to Level II Question: C

Answer Explanation: In a rising price environment, FIFO results in lower cost of goods sold and therefore higher gross profit than LIFO.

Choice "a" is incorrect.  In a rising price environment, FIFO results in higher ending inventory than LIFO.

Choice "b" is incorrect.  In a rising price environment, FIFO results in higher profits and therefore higher taxes than LIFO.

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March 19

By Kaplan Schweser | Posted on March 19, 2017


Answer to Level II Question: B

Answer Explanation: Because FIFO applies the earlier items purchased or produced to cost of goods sold in each period, prices must have decreased if cost of goods sold under FIFO exceeds cost of goods sold under LIFO.

Choice "a" is incorrect.  Because LIFO applies the most recent items purchased or produced to cost of goods sold, prices must have increased if cost of goods sold reported under FIFO is greater than the cost of goods sold reported under…

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March 18

By Kaplan Schweser | Posted on March 18, 2017


Answer to Level II Question: C

Answer Explanation: The application of FIFO in an inflationary environment will result in lower cost of goods sold and higher pretax income, which will lead to higher income taxes.

Choice "a" is incorrect.  The inventory turnover ratio will be lower under FIFO when prices are rising because cost of goods sold will be lower and ending inventory balances will be higher.

Choice "b" is incorrect.  The use of FIFO in an inflationary environment will…

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March 17

By Kaplan Schweser | Posted on March 17, 2017


Answer to Level II Question: C

Answer Explanation: During a period of rising prices, the FIFO cost flow assumption results in the most recent, higher cost purchases in inventory on the balance sheet while LIFO results in the most recent, higher cost, purchases being reflected in cost of goods sold on the income statement.  This combination results in the best approximation of the economic impact on the company’s financial statements (and ratios) as a result of rising…

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March 16

By Kaplan Schweser | Posted on March 16, 2017


Answer to Level II Question: A

Answer Explanation: This is the proper use of price-to-book value ratios.

Choice "b" is incorrect.  Both price-to-earnings and price-to-book value ratios measure relative value and not absolute values.

Choice "c" is incorrect.  The price-to-book value ratio can be negative if the firm has a negative book value.

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March 15

By Kaplan Schweser | Posted on March 15, 2017


Answer to Level II Question: C

Answer Explanation: For companies in the industry described, the price-to-sales ratio would be superior to any of the other ratios because the price-to-sales ratio is:

• More useful in valuing companies with negative earnings or negative book values (a frequent consequence of rapid technological change).

• Better able to compare companies in different countries that are likely to be using different accounting methods (a consequence of the…

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March 14

By Kaplan Schweser | Posted on March 14, 2017


Answer to Level II Question: B

Answer Explanation: Sales are less influenced by accounting choices than are other ratios.

Choice "a" is incorrect.  The price-to-sales ratio is no different from the other ratios in this regard.

Choice "c" is incorrect.  All of the mentioned ratios have merit for determining value.

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March 13

By Kaplan Schweser | Posted on March 13, 2017


Answer to Level II Question: C

Answer Explanation: If management is manipulating earnings, the earnings part of the equation will be incorrect and this can cause this measure to be inappropriate.

Choice "a" is incorrect.  An analyst can remove the effect of the non-recurring from earnings and then use the remaining earnings in a price/earnings ratio. 

Choice "b" is incorrect.  Trailing earnings may also provide a metric useful in determining value.

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March 12

By Kaplan Schweser | Posted on March 12, 2017


Answer to Level II Question: A

Answer Explanation: Because the firm has high-variance earnings (including negative earnings) and non-comparable asset bases, Nimmer will most likely choose price-to-sales multiples for comparison.

Choice "b" is incorrect.  Negative earnings will make a price-to-earnings ratio meaningless.

Choice "c" is incorrect.  Different business models requiring different levels of assets will make price-to-book value multiples non-comparable.

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March 11

By Kaplan Schweser | Posted on March 11, 2017


Answer to Level II Question: A

Answer Explanation: P/E ratios are self-explanatory and are easy for most investors to understand.  This is an advantage (rationale for using) because Low’s clients will be more apt to act on her recommendations.

Choice "b" is incorrect.  P/E ratios are commonly employed and this usage is an advantage.

Choice "c" is incorrect.  The denominator, EPS, is subject to manipulation by management through varying accounting practices.  Thus, a firm can…

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March 10

By Kaplan Schweser | Posted on March 10, 2017


Answer to Level II Question: B

Answer Explanation: Comparable companies are adjusted for accounting methods and extraordinary items as well as for the dilutive effects of convertible securities.  Otherwise, the ratios are not comparable because of these needed adjustments.

Choice "a" is incorrect.  The rate of growth is considered in calculating a company's price/earnings ratio.  Thus, companies with varying growth rates are likely to sell at varying P/E ratios.  It is best to…

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March 9

By Kaplan Schweser | Posted on March 09, 2017


Answer to Level II Question: A

Answer Explanation: The method of comparables holds that similar assets should sell at similar prices.  Johnson has applied the method of comparables because he compared Andersen to similar assets.  The price-to-earnings multiple makes direct comparisons meaningful by scaling each comparable firm's price to the equivalent of $1.00 of earnings.

Choice "b" is incorrect.  The method of comparables and the forecasted fundamentals method create a…

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March 8

By Kaplan Schweser | Posted on March 08, 2017


Answer to Level II Question: B

Answer Explanation: "A company generating positive economic profit will be undervalued by the market" is a misinterpretation.  The statement provides insufficient information to make this evaluation.  With any intrinsic value model, the stock price relative to the model's computed price could be over, under or about equal to a residual model value.  Generally, higher residual income should correlate with higher market valuations.

Choice "a" is…

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March 7

By Kaplan Schweser | Posted on March 07, 2017


Answer to Level II Question: C

Answer Explanation: Generally, a large portion of a DDM's value will be the terminal value; while a large portion of a residual income model's value will be the beginning book value.  Thus, more of the value is upfront for residual income models.

Choice "a" is incorrect.  Residual income models rely heavily on accounting data.  Management can manipulate accounting data and this can lead to incorrect valuations.  Analysts have to use their judgment in…

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March 6

By Kaplan Schweser | Posted on March 06, 2017


Answer to Level II Question: B

Answer Explanation: The other benchmarks are invalid as detailed below.  A firm's historical P/E ratios may give an indication as to what multiple it will sell at in the future.  Thus, this is the best benchmark of those offered.

Choice "a" is incorrect.  Home Hardware is much larger, has debt, and sells to a different customer base.  Thus, its P/E ratio is unlikely to be a good measure of what Smith Hardware should sell for.  A benchmark using peers…

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February 16

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February 14

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February 13

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February 12

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February 11

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February 10

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February 9

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February 8

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February 7

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February 6

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


February 5

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February 4

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February 3

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


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February 1

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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

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January 28

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January 27

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January 26

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January 25

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January 24

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


January 23

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January 22

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


January 21

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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