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Thread: Free CFA Level 1 practice question bank for June 2011 exam

  1. #121
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    Quote Originally Posted by dg mod View Post
    q 58 ans: B

    inventory cost does not include the storage cost but it does include the fixed production overhead which is incurred in the production of the inventory.

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    today's question (questions and answers provided by knowledge varsity)

    q 59 a firm has a current ratio of 1.5, it repays $100,000 of short-term loan, the impact of this on current ratio and cash flow from financing will be?


    options--------------cash flow from financing-----------current ratio

    a------------------------------decrease---------------------------------increase
    b------------------------------decrease---------------------------------decrease
    c------------------------------increase----------------------------------decrease


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    q.59 a

  2. #122
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    Q59 Ans A:

    CFF will decrease, where as current ratio will increase. If the current ratio were less than 1, then the current ratio would have decreased. Any time when the current ratio is more than 1, repayment of short term debt, accounts payable etc will result in increase in current ratio.


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    Today's Question (Questions and answers provided by Knowledge Varsity)

    Q60. A firm dealing in IPod has the following data for the purchases and value of its inventory. Cost = 110, Net Realizable Value = $120, replacement cost = $100, profit margin = $15

    If the firm is following GAAP, what should be the value of inventory in B/S?

    A. $105
    B. $110
    C. $120

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  3. #123
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    Ans 60: A

  4. #124
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    Q 61 Ans A:

    Inventory = Lower (cost, market)
    Market = Replacement cost ; subject to the condition that NRV – profit margin < Market < NRV

    First find NRV – profit margin => 120 – 15 = $105
    Replacement cost = $100, which is less than NRV – profit margin, so market is $105
    Lower ($110, $105) = $105
    Hence inventory is $105
    In IFRS, Lower (Cost, market) => Lower ( $110, $120) = $110

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    Today's Question (Questions and answers provided by Knowledge Varsity)


    Q 62 A firm following IFRS, recognized a writedown in inventory of $20 mn few years back. The inventory is currently reported in the balance sheet as $430 mn and the fair value of the inventory is $470 mn. The firm revalues the inventory, what should be the balance sheet value of the inventory

    A) $470 mn
    B) $430 mn
    C) $450 mn

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  5. #125
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    ================================================== =====================================
    Today's Question (Questions and answers provided by Knowledge Varsity)


    Q 62 A firm following IFRS, recognized a writedown in inventory of $20 mn few years back. The inventory is currently reported in the balance sheet as $430 mn and the fair value of the inventory is $470 mn. The firm revalues the inventory, what should be the balance sheet value of the inventory

    A) $470 mn
    B) $430 mn
    C) $450 mn

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    My answer is A.

    Reason being: In judging impairment for an asset, the following 2 points should be noted:
    1. Recoverability - Measured by whether Carrying Value > Undiscounted expected future CFs.
    2. If irrecoverable, then Impairment Loss = Fair Value (a.k.a. discounted expected future CFs) - Carrying Value.

    If we reverse the steps, then Carrying Value has to be at least equal to Fair Value to NOT be impaired (i.e., when Carrying Value = Fair Value, Impairment Loss = 0).

    P.S. I'm new here, so I'm just providing an opinion; hopefully I'm right! I'm taking the June exams lol!

  6. #126
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    Quote Originally Posted by IcyBlade View Post
    ================================================== =====================================
    Today's Question (Questions and answers provided by Knowledge Varsity)


    Q 62 A firm following IFRS, recognized a writedown in inventory of $20 mn few years back. The inventory is currently reported in the balance sheet as $430 mn and the fair value of the inventory is $470 mn. The firm revalues the inventory, what should be the balance sheet value of the inventory

    A) $470 mn
    B) $430 mn
    C) $450 mn

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    I agree with your logic. Seems right!

  7. #127
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    Q 62 Ans C:

    Under IFRS upward valuation of the inventory is allowed but the valuation should be done only the value of the write-down which in this case was $20 million. So the new inventory value will be $430 + $20 = $450 million

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    Today's Question (Questions and answers provided by Knowledge Varsity)

    Q 63 Suppose a firm over a year (the accounting period has the following inventory transactions:-

    Beginning Inventory( Jan 1st) : 100 Units @ 30 per unit
    Purchases and Sales during the year:
    Jan 3rd : Purchased 60 units @ $40 per unit
    Jan 5th : Sold 70 units
    Jan 10th : Purchased 20 units @ $50 per unit
    Jan 11th : Sold 90 units
    Jan 20th : Purchased 50 units @ $60 per unit
    Jan 21st: Sold 40 units

    LIFO COGS for the year will be, assuming perpetual method:-

    A. $8500
    B. $8200
    C. $7600

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  8. #128
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    Q 63 Ans B:

    Under perpetual method we will consider the inventory inflow and outflow on a rolling basis. So on the 1st sale date, 60 units recently purchased were sold and 10 units were sold from the beginning inventory, on 2nd sale, 20 units were sold costing $50 each and 70 units were sold from the beginning inventory. In the last sale transaction, all the 40 items were sold from the last purchase. So at the end we are left with 20 units from the beginning inventory and 10 units of the last made purchase.

    units-------------------------------price--------------------------total
    60-----------------------------------40---------------------------2400
    10-----------------------------------30----------------------------300
    20-----------------------------------50---------------------------1000
    70-----------------------------------30---------------------------2100
    40-----------------------------------60---------------------------2400
    200----------------------------------------------------------------8200


    However, under periodic method, we would have seen that all the 30 units left would have been from the beginning inventory.

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    Today's Question (Questions and answers provided by Knowledge Varsity)

    Q 64 Which of the following is the most likely impact of capitalization as compared to expensing on the financial statement?

    A. Cash flow from operations is lower
    B. Results in lower income in the year on which the expense is capitalized
    C. Variability in the net income is lower

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  9. #129
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    Q 64 Ans C :

    Capitalization will result in higher assets and then depreciation of this asset for the life of the asset. This results in lower variability of the income. Also the cash outflow it is determined as cash flow from investing rather than cash flow from operations, as a result CFO is higher. In the year in which capitalization is done, expensing will result in lower income as compared to capitalization, however in the subsequent periods, capitalization will have lower income.

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    Today's Question (Questions and answers provided by Knowledge Varsity)

    Q 65 A company bought a machine for $10,000, $500 tax was charged, transportation cost was $300, installation cost was $200. Company paid a firm $200 to train its employees. Company had to modify the plant to accommodate the machine which had cost $500. The estimated life of machine is 3 years. How much cost the company will capitalize and how much it will expense?

    A. $11,000
    B. $11,500
    C. $11,700

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  10. #130
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    Thanks to all the members for participating in the Forum. I believe that these questions would be useful for your preparation.

    This is Clarification Regarding Question No - 8.
    Please note that the amount of loan taken was Rs. 10,00,000 and Not 10,000,000
    so the answer related to the interest is correct.

    There will be instances where due to delivery pressure we have some error and we will post errata to those in the forum.
    I will now be actively taking part in the discussion, please feel free to post on the forum.

    Thanks
    Ratan Gupta, FRM
    Learning Officer
    Knowledge Varsity



    2nd month the interest will be paid on the reduced principal => 10,00,000

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