Preliminary Test for CFA Program

Preliminary Test – CFA® Program

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Design Document

Document Control

Prepared by: Mohamed Farouk

Version no: 0.1

Version date: 22.06.2015

Status: Initial Draft Approved Document Minor Revision Major Revision

Version history

Version no. Date Changed by Nature of amendment

0.1 22.06.2015 Mohamed Farouk Initial draft

Contents Design ...........................................................................................................................................................2

Purpose ...................................................................................................................................................................2

Analysis ...................................................................................................................................................................2

Development and Structure ...........................................................................................................................2

Grading .........................................................................................................................................................2

Testing Rules .................................................................................................................................................2

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Design

Purpose To test the basic knowledge level required for enrolling into the CFA® program – Level I.

Analysis The focus of this test will be on investment tools as the core topics of the CFA® program; including, Financial

Reporting & Analysis, economics, quantitative methods, and corporate finance. Other topics (asset classes and

portfolio management) are a bit advanced for a preliminary test.

The specific areas covered under the test are:

Basic accounting and financial analysis rules

Time value of money concept and its application for projects’ evaluation

Statistics and probability concepts

Micro and macro economics

Development and Structure The test is developed on a knowledge level as per Bloom’s taxonomy. Some questions are set with above

average level of difficulty to assess the analytical and time management skills of participants.

This is a paper & pencil time-based test with total allocated time of 60 minutes. Similar to CFA-level I actual test,

MCQ average estimated time is 1.5 minutes each. Most of the questions are based on the curriculum and

Schweser Notes with some minor amendments. The test is delivered in two sections; multiple choice questions,

and essay questions.

Grading

Testing Rules No calculator is required.

Electronic devices are not allowed.

External documents are not allowed.

Other rules apply as per the client’s testing policy (e.g. beverages, brief toilet breaks, etc…)

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Test

Table of Contents Test Structure ................................................................................................................................................3

PART I: Multiple Choice Questions ..................................................................................................................4

Financial Reporting and Analysis ............................................................................................................................4

Quantitative Methods and Corporate Finance ......................................................................................................6

Economics ...............................................................................................................................................................7

PART II: Essay Questions ................................................................................................................................8

Financial Reporting and Analysis (11 minutes) ......................................................................................................8

Quantitative Methods and Corporate Finance (5 minutes) ...................................................................................8

Economics (5 minutes) ...........................................................................................................................................8

Test Structure This test covers the basic knowledge level required for enrolling into CFA® program. It covers accounting,

economics, and financial mathematics. The test is delivered in two sections; multiple choice questions, and

essay questions. Total time allocated for the test is 60 minutes. Good Luck!

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PART I: Multiple Choice Questions From A, B, and C; circle the letter associated with the most appropriate answer. Time allocated for multiple

choice questions is 1.5 minutes each.

Financial Reporting and Analysis 1. A firm's financial position at a specific point in time is reported in the:

A. Balance sheet.

B. Income statement.

C. Cash flow statement.

2. Information about accounting estimates, assumptions, and methods chosen for reporting is most likely

found in:

A. The auditor's opinion.

B. Financial statement notes.

C. Management's Discussion and Analysis.

3. If an auditor finds that a company's financial statements have made a specific exception to applicable

accounting principles, she is most likely to issue a:

A. Dissenting opinion.

B. Cautionary note.

C. Qualified opinion.

4. Which of the following statements least accurately describes a role of financial statement analysis?

A. Use the information in financial statements to make economic decisions.

B. Provide reasonable assurance that the financial statements are free of material errors.

C. Evaluate an entity's financial position and past performance to form opinions about its future

ability to earn profits and generate cash flow.

5. Accounts receivable and accounts payable are most likely classified as which financial statement

elements?

Accounts receivable Accounts payable

A. Assets Liabilities

B. Revenues Liabilities

C. Revenues Expenses

6. Annual depreciation and accumulated depreciation are most likely classified as which financial

statement elements?

Depreciation Accumulated depreciation

A. Expenses Contra Liabilities

B. Expenses Contra Assets

C. Liabilities Contra Assets

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7. The Balance Sheet equation is stated as:

A.

B.

C. –

8. A decrease in assets would least likely be consistent with a(n):

A. Increase in expenses.

B. Decrease in revenues.

C. Increase in contributed capital.

9. If a firm raises $10 million by issuing new common stock, which of its financial statements will reflect the

transaction?

A. Income statement and statement of owners' equity.

B. Balance sheet, income statement, and cash flow statement.

C. Balance sheet, cash flow statement, and statement of owners' equity.

10. An auditor needs to review all of a company's transactions that took place between August 15 and

August 17 of the current year. To find this information, she would most likely consult the company's:

A. General ledger.

B. General journal.

C. Financial statements.

11. A company sells KWD 10,000 of office supplies to a customer in March, Who pays the invoice in April.

The month of revenue recognition for the company under cash basis and accrual basis will be:

Cash basis Accrual basis

A. April April

B. March April

C. April March

12. Which is least likely one of the conclusions about the impact of a change in financial reporting standards

that might appear in management's discussion and analysis?

A. Management has chosen not to implement the new standard.

B. Management is currently evaluating the impact of the new standard.

C. The new standard will not have a material impact on the company's financial statements.

13. Which principle requires that cost of goods sold be recognized in the same period in which the sale of

the related inventory is recorded?

A. Going concern.

B. Certainty.

C. Matching.

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14. Which of the following would least likely increase pretax income?

A. Decreasing the bad debt expense estimate.

B. Increasing the useful life of an intangible asset.

C. Decreasing the residual value of a depreciable tangible asset.

Quantitative Methods and Corporate Finance 1. How much must be invested today at 0%, to have KWD 100 in three years?

A. KWD 77.75

B. KWD 100.00

C. KWD 126.30

2. Should a company accept a project that has an IRR of 14% and an NPV of $2.8 million if the cost of

capital is 12%?

A. Yes, based only on the NPV.

B. Yes, based on the NPV and the IRR.

C. No, based on both the NPV and IRR.

3. Which measure of central tendency is most affected by including rare but very large positive values?

A. Mean

B. Median

C. Mode

4. At a charity ball, 10 names are put into a hat. Two of the names are identical. On a random draw, what is

the probability that one of these two names will be drawn?

A. 0.04

B. 0.05

C. 0.20

5. Which of the following values cannot be the probability of an event?

A. 0.00

B. 1.00

C. 1.25

6. Two mutually exclusive events:

A. Always occur together.

B. Cannot occur together.

C. Can sometimes occur together.

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Economics 1. A shift in the supply curve of bread is least likely to result from a change in:

A. Wages of bakers.

B. The price of bread.

C. The price of wheat.

2. If quantity supplied of refrigerators exceeds quantity demanded at the current market price, the most

likely market response would be a(n):

A. Stable market disequilibrium.

B. Increase in demand for refrigerators.

C. Decrease in the price of refrigerators.

3. The observation “as a price of good falls, buyers buy more of it” is best known as:

A. Consumer surplus.

B. The law of demand.

C. The market mechanism.

4. An oligopolistic industry has:

A. Few barriers to entry.

B. Few economies of scale.

C. A great deal of interdependence among firms.

5. As a measure of general price level (inflation), CPI stands for:

A. Cost Performance Index.

B. Consumer Price Index.

C. Critical Performance Indicator.

6. Real GDP is best described as the value of:

A. Current output measured at current prices.

B. Current output measured at base-year prices.

C. Base-year output measured at current prices.

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PART II: Essay Questions Answer the following questions. Time allocated for each question is provided.

Financial Reporting and Analysis (11 minutes) What are the three major components (sections) of Balance Sheet and Cash Flow Statement?

List three sources of financial information about a given corporation.

List two reasons for performing a financial analysis.

Quantitative Methods and Corporate Finance (5 minutes) Explain the difference between descriptive and inferential statistics.

Economics (5 minutes) What is the meaning of opportunity cost? For a manufacturing company; what is the opportunity cost from

holding excessive cash balance?

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Model Answers

PART I: Multiple Choice Questions Financial Reporting and Analysis

15. A

The balance sheet reports a company's financial position as of a specific date. The income statement,

cash flow statement, and statement of changes in owners' equity show the company's performance

during a specific period.

16. B

Information about accounting methods and estimates is contained in the footnotes to the financial

statements.

17. C

An auditor will issue a qualified opinion if the financial statements make any exceptions to applicable

accounting standards and will explain the effect of these exceptions in the auditor's report.

18. B

This statement describes the role of an auditor, rather than the role of an analyst. The other responses

describe the role of financial statement analysis.

19. A

Accounts receivable are an asset and accounts payable are a liability.

20. B

Annual depreciation is an expense. Accumulated depreciation is a contra asset account that typically

offsets the historical cost of property, plant, and equipment.

21. B

By definition

22. C

The expanded accounting equation shows that

— — . A decrease in assets is

consistent with an increase in expenses or a decrease in revenues but not with an increase in

contributed capital.

23. C

The $10 million raised appears on the cash flow statement as a cash inflow from financing and on the

statement of owners' equity as an increase in contributed capital. Both assets (cash) and equity common

stock) increase on the balance sheet. The income statement is unaffected by stock issuance.

24. B

The general journal lists all of the company's transactions by date. The general ledger lists them by

account.

25. C

Under the cash basis, the seller recognizes the sale in April, when the cash is received. Under the accrual

basis, the seller recognizes the sale in March, when it issues the invoice.

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26. A

Management can discuss the impact of adopting the new standard, conclude that it does not apply or

will have no material impact, or state that they are still evaluating the potential impact.

27. C

The matching principle requires that the expenses incurred to generate the revenue be recognized in

the same accounting period as the revenue.

28. C

Decreasing the residual (salvage) value of a depreciable long-lived asset will result in higher depreciation

expense and, thus, lower pretax income.

Quantitative Methods and Corporate Finance 1. B

Since no interest is earned, there is no Time Value of Money (TVM). KWD 100 is needed today to have

KWD 100 in three years.

2. B

The project should be accepted on the basis of its positive NPV and its IRR exceeding the cost of capital.

3. A

Mean as a measure of central tendency is most affected by the presence of outliers in the data.

4. C

5. C

Probabilities may range from 0 (meaning no chance of occurrence) through 1 (which means a sure

thing).

6. B

One or the other may occur, but not both.

Economics 1. B

Supply changes in response to a change in the cost of inputs (labor or materials). A change in the price of

the product is a movement along the supply curve (change in quantity supplied), not a shift of the supply

curve.

2. C

The price of refrigerators is likely to decline as inventories build and producers compete for business.

Quantity demanded of refrigerators is likely to increase as price decreases, but the demand curve for

refrigerators will not change as a result. A change in price is a movement along the demand curve to a

different quantity, not a change in demand.

3. B

By definition.

4. C

An oligopolistic industry has a great deal of interdependence among firms. One firm's pricing decisions

or advertising activities will affect the other firms.

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5. B

By definition.

6. B

Real GDP is the value of current period output calculated using prices from a base year.

PART II: Essay Questions Financial Reporting and Analysis

The major components of Balance Sheet are:

o Assets

o Liabilities

o Owners’ Equity

The major components of Cash Flow Statement are:

o Cash flow from operating activities

o Cash flow from investing activities

o Cash flow from financing activities

Sources of financial information about a given corporation:

o Financial statements

o Notes to the financial statements (disclosures)

o Management's commentary (management’s discussion and analysis (MD&A))

o Corporate press releases

o Reliable media

Reasons for performing a financial analysis:

o Valuation of equity securities

o Assessment of credit risk

o Performance of due diligence in an acquisition

o Evaluation of a subsidiary's performance relative to other business units

Quantitative Methods and Corporate Finance Descriptive statistics are used to summarize the important characteristics of large data sets to

consolidate a mass of numerical data into useful information. Inferential statistics refers to using

statistics to make forecasts, estimates, or judgments about a large set of data on the basis of the

statistical characteristics of a smaller set (a sample).

Economics Opportunity cost refers to the items given up when making a choice. In other words it’s the next best

alternative. The opportunity cost from holding excessive cash is represented in the forgone revenues

from deploying the excess cash into production.

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Preliminary Test for CFA Program