CFA Program Level I — Practice Questions, Part 2 flashcards

6 of 70 questions free to study here · 24 topics · the whole deck is built into Willys

Multiple-choice practice questions, one best answer each, on financial reporting, inventories, taxes, leases, ratios, capital budgeting, equity and bond valuation, derivatives and portfolios.

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Practice deck · part of CFA Program Level I · written against: CFA Program Level I curriculum topics; Standards of Practice Handbook, 12th edition (2024), including Standard I(E) Competence. Updated 2026-10-10.

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A company reports net income of 250, depreciation of 40 and a gain of 15 on the sale of equipment. During the year inventory rose by 30 and accounts payable rose by 20. Using the indirect method, what is cash flow from operating activities?

A) 225
B) 265
C) 295
D) 325

B) 265

250 + 40 − 15 − 30 + 20 = 265: add back depreciation, remove the gain (the sale proceeds are an investing inflow), subtract the inventory build and add the rise in payables. Adding the gain instead of removing it gives 295.
Financial Statements
A company buys equipment for 300. In year 1 it records book depreciation of 60 and tax depreciation of 120. The tax rate is 25%. What deferred tax liability does it report at the end of year 1?

A) 60
B) 30
C) 75
D) 15

D) 15

The carrying amount of 240 exceeds the tax base of 180 by 60, and 60 × 25% = 15 of tax is deferred. 60 is the temporary difference itself, before applying the tax rate.
Income Taxes
A project costs 5,000 today and is expected to return 2,000, 2,500 and 1,500 at the end of years 1, 2 and 3. The cost of capital is 8%. What is the project's NPV?

A) 1,000.00
B) 5,185.95
C) 185.95
D) 600.82

C) 185.95

The present value of the inflows is 2,000 ÷ 1.08 + 2,500 ÷ 1.08² + 1,500 ÷ 1.08³ = 5,185.95, less the 5,000 outlay. 1,000 ignores discounting, and 5,185.95 forgets to subtract the outlay.
Capital Budgeting
If a market is semi-strong-form efficient but not strong-form efficient, which kind of information could still let an investor earn consistent abnormal returns?

A) Earnings announcements released to the public
B) Published financial statements and P/E ratios
C) Material nonpublic information about a company
D) Past prices and trading volume of the stock

C) Material nonpublic information about a company

Semi-strong efficiency means prices already reflect all public information, both market data and published fundamentals, so only private information could earn abnormal returns. Trading on it is barred by insider-trading law and by the CFA Institute Standards.
Market Efficiency
The 1-year spot rate is 2% and the 2-year spot rate is 4%. What is the implied 1-year forward rate one year from now?

A) 8.16%
B) 2.00%
C) 3.00%
D) 6.04%

D) 6.04%

$\frac{1.04^2}{1.02} - 1$ = 6.04%, the rate that makes two rolled 1-year investments match the 2-year spot. 8.16% is the cumulative 2-year return, not a 1-year rate.
Credit and Term Structure
A 62-year-old client with modest savings will need withdrawals from her portfolio to cover living costs within two years. She tells her adviser she wants an aggressive growth portfolio. How should the adviser set her risk objective?

A) Above average, reflecting her stated willingness to take risk
B) Average, as a compromise between willingness and ability
C) Above average, with a cash reserve kept for the withdrawals
D) Below average, reflecting her limited ability to bear risk

D) Below average, reflecting her limited ability to bear risk

When willingness exceeds ability, the adviser generally follows the lower ability to bear risk and explains the conflict to the client. Splitting the difference still exposes her near-term spending to losses she cannot afford.
Planning and Behavioral Finance

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Review status: Second-reader reviewed, with corrections applied.

Checked against:

Checked against IFRS Standards (IAS 2, IAS 7, IAS 12, IAS 16, IAS 38, IFRS 15, IFRS 16) and FASB ASC 330, 606, 740 and 842 summaries (reference only; no text copied).
Checked against standard texts: Brealey, Myers & Allen, Principles of Corporate Finance; Penman, Financial Statement Analysis and Security Valuation; Bodie, Kane & Marcus, Investments; Fabozzi, Bond Markets, Analysis, and Strategies; and Hull, Options, Futures, and Other Derivatives (reference only; no text copied).

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