» CFA 1 – 10 questions

Identify the most appropriate explanation of ''channel stuffing''.

Channel stuffing is an aggressive revenue recognition strategy in which the firm increase the supplier's orders and recognizes the expense before the goods are received.

Channel stuffing is a conservative revenue recognition strategy in which the firm hold goods and delays the supply of goods to the distribution channel.

Channel stuffing is an aggressive revenue recognition strategy in which the firm oversupplies goods to the distribution channel.

Sullivan Investments, an asset management firm, complied with the GIPS standards on 1 January 2006. Can Sullivan link its non-GIPS compliance performance for periods beginning on or after 1 January 2000 with its GIPS compliance performance?

No

Yes

Only if it discloses periods of non-compliance.

Which of these characteristics best describe commodity goods?

High competition and high profitability.

Low competition and high profitability.

High competition and low profitability.

Under U.S. GAAP at the end of year 1, EBB would recognize $0 revenue, $0 cost of construction and $0 income. The $26 million expenditure would be recorded as an increase in inventory account and decrease in cash (if EBB paid cash for all expenditures).

Cash outflows from operations.

debt-to-equity.

Total assets.

Bill Hardwick, CFA, is a bond specialist and a fixed-income portfolio manager for a large pension fund. Hardwick is considering inclusion of highly structured mortgage securities in the pension fund. However, his team has analyzed these products and has come to the conclusion that it is difficult to distinguish between good and bad investment options due to the complexity and layers of the securities. Rather than sort it all out, Hardwick opts to just simply avoid this sector entirely and invest instead in simpler securities that can be more easily analyzed and understood. Has Hardwick most likely violated the Standards?

No

Yes, with respect to misrepresentation.

Yes, with respect to diligence and reasonable basis

Gilbert Love worked as financial analyst at Milton Securities. During his employment at Milton, Love covered Indigo Corp and developed detailed financial models, assumptions and supporting reports. When Milton switched his job, his new employer assigned him to analyze Indigo Corp. Milton developed a new model with improved assumptions and specifications and re-created the supporting records by gathering data from the covered company. Has Milton violated any CFA Institute Code and Standards?

No, he is in compliance with the Code and Standards.

Yes, he has violated Standard V-C ‘Record Retention’ by re-creating the supporting records.

Yes, he violated ‘Misrepresentation’ and ‘Record Retention’ by developing the model and re-creating the supporting records for Indigo Corp.

Which statement most accurately describes risk transfer and risk shifting?

Risk shifting and risk transfer are the same – both involve insurance, and can cover all of the insured risk.

Risk transfer occurs when the insurer sells many policies with risks that have high correlations, while risk shifting involves derivatives so that the firm may adjust its probability distribution of returns.

Risk transfer is handled through an insurance policy, while risk shifting involves derivatives to modify a firm’s risk levels.

A company has just issued $5 million of mandatory redeemable preferred shares with a par value of $100 per share and a 7 percent dividend. The issue matures in 5 years. Which of the following statements is least likely correct? The company’s:

Debt/Total capital ratio will improve.

preferred shareholders will rank below debt holders should the company file for bankruptcy.

interest coverage ratio will deteriorate.

By entering into a currency swap both parties:

make payments in different currencies and in different notional amounts.

are exposed to less counterparty risk because principal amounts are exchanged at the beginning and end of the swap.

have to borrow funds at relatively higher interest rates compared to borrowing directly from their banks.

The probability that the Eurozone economy will grow this year is 18%, and the probability that the European Central Bank (ECB) will loosen its monetary policy is 52%. Assuming that the joint probability that the Eurozone economy will grow and the ECB will loosen its monetary policy is 45%, then the probability that either the Eurozone economy will grow or the ECB will loosen its the monetary policy is closest to:

42.12%.

25%.

11%.

CFA 1 - 10 Questions