CFA Accounting + Ethics
A decrease in both the labor force participation ratio and the unemployment rate is most likely caused by: an increase in discouraged workers. an increase in underemployed workers. a decrease in voluntarily unemployed persons.
A is correct. Discouraged workers have given up seeking employment and are statistically outside the labor force. Therefore, an increase in discouraged workers will decrease the labor force and thus the labor participation ratio, which is the ratio of labor force to total working age population. Additionally, an increase in discouraged workers will decrease the unemployment rate because discouraged workers are not counted in the official unemployment rate.
A national government responds to a severe recession by funding numerous infrastructure projects using deficit spending. Which school of economic thought is most consistent with such action? Keynesian Monetarist Neoclassical
A is correct. Keynesian economics is based on government intervention in the form of fiscal policy. The national government responds to the recession by using deficit spending to fund infrastructure projects.
Under US GAAP, a lessee that has the option to purchase the asset at the end of the term and will likely do so is most likely: required to classify the lease as a finance lease. required to classify the lease as a sales-type lease. permitted to classify the lease as an operating lease if the term represents a substantial portion of the asset's useful life.
A) required to be a finance lease. Sales lease is a term for the lessor. It is required to be classified as a finance lease if there's reasonable odds to keep the asset after or if the lease makes up a substantial portion of the asset's life.
Which of the following statements is most likely correct regarding the CFA Institute Professional Conduct Program? The sanctions imposed by CFA Institute include public censure Members and candidates are not required to disclose their involvement in civil litigation on which the courts have yet to rule Members and candidates must accept the sanctions proposed by CFA Institute's Professional Conduct Program staff upon concluding that a violation has occurred.
A) sanctions range from public censure to revocation of their charter.
Which of the following statements about employment levels over the course of a typical business cycle is most accurate? The unemployment rate remains high during the recovery phase Businesses slow their rate of hiring, causing the unemployment rate to begin to rise during the slowdown phase Adding employees on a part-time basis in order to meet rising demand is most common in the expansion phase
A) the unemployment rate remains high during the recovery phase. expansion phase - employers are confident so they can hire full time workers. while in the recovery phase, part-time employees and overtime workers are more common to meet demand.
Which of the following statements is most accurate? According to the Austrian school of thought, an economic crisis on the scale of the Great Depression: should be addressed by reducing interest rates. should be addressed with minimal government intervention. represents efficient responses of the economy to external real shocks.
According to the Austrian school, economic cycles (including recessions) are caused by ill-advised government policies, including setting interest rates at unjustifiably low levels. In the event of an economic crisis, the most appropriate response is to allow the economy to adjust to a new equilibrium with a minimum level of government intervention. (AKA let the market sort it out and nonintervention) It is the neoclassical school that believes expansions and contractions are a result of efficient responses of the economy to external real shocks that shift the supply curve.
A composite return reflects the performance of: all portfolios managed by the firm, regardless of investment strategy. all discretionary portfolios that meet the composite definition. all discretionary and non-discretionary portfolios that meet the composite definition.
B) composite portfolios only contain discretionary portfolios. Composites are built upon investment mandate or strategy.
Meghan Eriksen, CFA, oversees managerial allocations for a municipal pension fund. Over the past three months, Eriksen led a team tasked with choosing a new asset manager after the fund's trustees voted to increase its allocation to international fixed-income securities. During one of several meetings with Isaac Layton of Diallo Asset Management as part of the due diligence process, Eriksen inquires about the firm's philanthropic activities. Layton explains that Diallo donates 1% of its revenues to various charities each year. Eriksen mentions her volunteer work on behalf of a charitable organization that funds leukemia research. Although noting she no longer has any direct involvement with the organization, Eriksen encourages Layton to consider it when making decisions about which organizations Diallo will support at the end of this year. Diallo later donates $50,000 of its $2 million budget for charitable donations to the leukemia research organization recommended by Eriksen. Has Eriksen most likely violated the Standards? No Yes, with respect to independence and objectivity Yes, with respect to additional compensation arrangements
B) Even though Eriksen didn't receive any additional comp for this event. by soliciting a donation for her preferred charity, which can appear to be an attempt to influence the choice of which firm will manage the pension fund's assets. Eriksen has not violated Standard IV(B) - Additional Compensation Arrangements, which requires her to obtain written consent before receiving compensation that competes with her employer's interests.
An analyst will most likely be able to detect manipulations to accounts payable with the intention to create the appearance of improved cash flow from operations by examining the: expenses section of the income statement. operations section of the cash flow statement current liabilities section of the balance sheet.
B) Operations If the company was delaying payments to creditors or manipulating cash flows it would most likely show up in the cash flow statement.
Which of the following would most likely signal that a company may be using aggressive accrual accounting policies to shift current expenses to later periods? Over the last five-year period, the ratio of cash flow to net income has: increased each year. decreased each year. fluctuated from year to year.
B) decreased each year B is correct. If the ratio of cash flow to net income for a company is consistently below 1 or has declined repeatedly over time, this may be a signal of manipulation of information in financial reports through aggressive accrual accounting policies. When net income is consistently higher than cash provided by operations, one possible explanation is that the company may be using aggressive accrual accounting policies to shift current expenses to later periods.
An analyst covering a company that adheres to US GAAP would most likely find its pension expense reported: in other comprehensive income. in the notes to the financial statements. as a separate line on the income statement.
B) in the notes to the financial statements. Pension costs attributable to employees who are directly involved in the production process are included in cost of goods sold. Benefits earned by employees who are not directly involved in production are reported as part of general and administrative expenses. A company's actual pension expense can only be found in the disclosures that appear in the notes to the financial statements.
Jim Joyner, CFA, a portfolio manager with Breakstone Asset Management, works with individual investors. CFA Institute's Disciplinary Review Committee (DRC) recently ruled that Joyner had violated the Standards, and affirmed the Profession Conduct Program staff's recommendation that his membership be suspended for two years. Which of the following statements is most accurate? Joyner: may appeal the DRC's ruling. may continue to work with clients while his suspension is in effect. must not engage in any professional activities while his suspension is in effect.
B) may continue to work the suspension only suspends his use of the CFA designation.
Ashley Bieksa, CFA, an investment advisor, is meeting with her long-time clients, Fred and Wanda Jackson. Bieksa recommends the services of two brokers, both of whom provide top-quality execution at a fair, competitive price. Before the Jacksons choose which broker to execute their trade orders, Bieksa says, "I must tell you that I have an arrangement with Duke Brothers, who compensate me for referrals like this. I have no such arrangement with Winthorp & Valentine." Equipped with this information, the Jacksons request that Bieksa use Duke Brothers to process their trades. Bieksa most likely: acted in compliance with the Standards. violated the Standards by failing to provide sufficient disclosure of the referral arrangement. would not have violated the Standards if the Jacksons had chosen to use Winthorp & Valentine to process their trades.
B) should provide an estimate of how much monetary gain the referral arrangement provides.
The Investment Analysis, Recommendations, and Actions standard states that members and candidates must: find an investment suitable for their client before making a recommendation. make reasonable efforts to ensure that performance presentation is fair, accurate, and complete distinguish between fact and opinion in the presentation of investment analysis and recommendations.
C is correct. The V.B.4 Communications with Clients and Prospective Clients section of the Investment Analysis, Recommendations, and Actions standard states that members and candidates must distinguish between fact and opinion in the presentation of investment analysis and recommendations. A is incorrect because this standard is discussed in the III.C.1b Suitability section of the Duties to Clients standard. B is incorrect because performance presentation is discussed in the III.D Performance Presentation section of the Duties to Clients standard.
A central bank will most likely allow the economy to self-correct in periods of: high inflation, fast economic growth, and low unemployment. low inflation, slow economic growth, and high unemployment. high inflation, slow economic growth, and high unemployment.
C is correct. This scenario is often referred to as stagflation. Here, the economy is likely to be left to self-correct because no short-term economic policy is thought to be effective.
According to the Code of Ethics, members of CFA Institute and candidates for the CFA designation must: maintain their professional competence to exercise independent professional judgment. place the integrity of the investment profession and the interests of clients above their own personal interests. practice in a professional and ethical manner with the public, clients, and others in the global capital markets.
C) B is correct. Members of CFA Institute and candidates for the CFA designation must place the integrity of the investment profession and the interests of clients above their own personal interests. A is incorrect because members of CFA Institute and candidates for the CFA designation must maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals. The exercise of independent professional judgment is associated with using reasonable care. C is incorrect because members of CFA Institute and candidates for the CFA designation must practice and encourage others to practice in a professional and ethical manner that will reflect credibly on themselves and the profession. Members are supposed to act with integrity, competence, diligence, and respect and in an ethical manner with the public, clients, and other market participants.
As stated in the revised 11th edition, the Standards of Professional Conduct: require supervisors to focus on the detection and prevention of violations. adopt separate ethical considerations for programs such as CIPM and Investment Foundations. address the risks and limitations of recommendations being made to clients.
C) C is correct. Given the constant development of new and exotic financial instruments and strategies, the standard regarding communicating with clients now includes an implicit requirement to discuss the risks and limitations of recommendations being made to clients. A is incorrect because the updated standard for members and candidates with supervision or authority over others within their firms stresses broader compliance expectations, which include the detection and prevention aspects of the original version that was the prior focus. B is incorrect because the updated standard not only maintains the integrity of the CFA Program but also expands the same (not separate) ethical considerations when members or candidates participate in such programs as the CIPM Program and the Investment Foundations Certificate.
Firms that claim compliance with the GIPS standards are required to receive a verification: before the firm can initially claim compliance. after the firm has claimed compliance for 12 months. never; verification is not required.
C) never, verification is not required C is correct. Firms are not required to be verified in order to claim compliance with the GIPS standards, although verification is recommended and viewed as best practice.
As stated in the revised 11th edition, the Standards of Professional Conduct: require supervisors to focus on the detection and prevention of violations. adopt separate ethical considerations for programs such as CIPM and Investment Foundations. address the risks and limitations of recommendations being made to clients.
C) C is correct. Given the constant development of new and exotic financial instruments and strategies, the standard regarding communicating with clients now includes an implicit requirement to discuss the risks and limitations of recommendations being made to clients. A is incorrect because the updated standard for members and candidates with supervision or authority over others within their firms stresses broader compliance expectations, which include the detection and prevention aspects of the original version that was the prior focus. B is incorrect because the updated standard not only maintains the integrity of the CFA Program but also expands the same (not separate) ethical considerations when members or candidates participate in such programs as the CIPM Program and the Investment Foundations Certificate.
Allison Ostrander, CFA, works for a major trust company and is proud of her investment performance over the past 8 years. Her managed portfolios have averaged a 12% annual return over this time period and she regularly informs her clients of the prior performance. She also shares this information with prospective clients, adding that they should expect an annual return of at least 8% in the future based on her performance history. Has Ostrander most likely violated the Standards? No Yes, with respect to performance presentation only Yes, with respect to performance presentation and misrepresentation
C) Standard III(D) Performance Presentation requires members and candidates to communicate performance information in a manner that is "fair, accurate, and complete." According to the guidance for this Standard, members and candidates "should not state or imply that a client will obtain or benefit from a rate of return that was generated in the past." Standard I(C) - Misrepresentation prohibits members and candidates from providing any assurances or implied guarantees regarding the future performance of volatile investments. In this example, Ostrander has violated both of the Standards discussed above.
A current Code of Ethics principle reads in full, "Promote the integrity: and viability of the global capital markets." of and uphold the rules governing capital markets." and viability of the global capital markets for the ultimate benefit of society."
C) C is correct. One of the principles in the Code of Ethics was updated to reflect the role that the capital markets have in society as a whole. A is incorrect because it is incomplete, missing the additional language to reflect the role that the capital markets have in society as a whole. B is incorrect because this is the old principle as written in the Code of Ethics, which was recently updated to reflect the role of the capital markets in society as a whole.
Benchmarks for minimally acceptable behaviors of community members are: a code of ethics. laws and regulations. standards of conduct.
C) Standards of conduct. C is correct. Standards of conduct are applied to specific communities or societal groups and identify specific behaviors required of community members. These standards of conduct serve as benchmarks for the minimally acceptable behavior of community members. Codes of ethics serve as a general guide for how community members should act; they communicate the organization's values and overall expectations regarding member behavior, but they do not identify specific behaviors required of community members. Laws and regulations are rules of conduct defined by governments and related entities about obligatory and forbidden conduct broadly applicable for individuals and entities under their jurisdiction.
Which of the following is most accurately described as an association of national regulatory authorities? The Securities and Exchange Commission The International Accounting Standards Board The International Organization of Securities Commissions
C) The International Organization of Securities Commissions (IOSCO) is composed of various financial regulators from more than 115 countries. For example, the US Securities and Exchange Commission (SEC) is one of that country's representatives. IOSCO's purpose is to facilitate the evolution of financial market regulation in an increasingly globalized context. These efforts help to achieve uniform application of international standards, such as IFRS and the Basel standards. The IASB is an independent accounting standards-setting body. The standards issued by the IASB are authoritative to the extent that they are recognized and adopted by local regulators.
One concern when screening for stocks with low price-to-earnings ratios is that companies with low P/Es may be financially weak. What criterion might an analyst include to avoid inadvertently selecting weak companies? Net income less than zero Debt-to-total assets ratio below a certain cutoff point Current-year sales growth lower than prior-year sales growth
Debt to total assets below a certain point. If DTA ratio is too high it indicates that the company may be over leveraged and possibly weak.
Under IFRS, interest paid on operating leases is most likely permitted to be classified as: an operating activity only. an operating activity or a financing activity only. an operating activity, a financing activity, or an investing activity.
IFRS permits any interest paid to be financing or operating.
A government entity that regulates an authorized monopoly will most likely base regulated prices on: marginal cost. long run average cost. first degree price discrimination.
LRAC - this lets the company and investors earn a normal amount of profit
Under a Stackelberg duopoly model with a leader setting output and a follower reacting, which company most likely ends up in a superior position? Leader Follower New entrants
Leader - can produce more than it's optimal amount forcing the follower to exit or take a smaller role.
The inventory-sales ratio is most likely to be rising: as a contraction unfolds. partially into a recovery. near the top of an economic cycle.
Near the top - Near the top of a cycle, sales begin to slow before production is cut, leading to an increase in inventories relative to sales.
MLC Engineering issues financial statements in accordance with IFRS and uses the revaluation model for its machinery. The company purchased a machine at the end of 20X2 for $25,000. The machine's fair value was $27,000 and $22,000 at the end of 20X3 and 20X4, respectively. The change in the value of the revaluation surplus account attributable to this machine over the course of 20X4 is closest to: $2,000. $3,000. $5,000.
Since the company is IFRS they can write up the value of their machinery. SO in 20X3 they would have a increase in revaluation surplus by $2000 Then in 20X4 they would have a decrease of value by $5000, thus driving a $2000 decrease in revaluation surplus account and a $3000 loss on the income statement.
Which of the following will most likely result in the creation of a deferred tax liability? Taxable temporary differences only Deductible temporary differences only Both taxable temporary differences and deductible temporary differences
Taxable temporary differences are created when either: 1)The carrying amount of an asset exceeds its tax base 2) The carrying amount of a liability is less than its tax base A liability, which is temporarily recorded on the company's balance sheet, must be settled in a future period. Deductible temporary differences require the creation of a deferred tax asset.
Income tax payments attributable to gains realized from the sale of a business unit are most likely required to be reported as an operating cash flow under: IFRS only. US GAAP only. both IFRS and US GAAP.
US GAAP require companies to report all income tax payments as operating activities. By contrast, income tax payments that are specifically identified with investing activities, such as the disposal of a business unit, are not required to be reported as operating activities under IFRS.
Dorothy Orchard, CFA, has been asked to review Twilight Capital's order processing and execution policy. Orders are not required to be filled on a strict first-in-first-out basis and partial fills are permitted for grouped trades. Is Twilight Capital's policy most likely consistent with the recommended procedures for compliance with Standard III(B) - Fair Dealing? Yes No, because it allows for partial fills No, because it allows for deviations from a first-in-first-out basis
Yes Standard III(B) - Fair Dealing, firms should process orders on a first-in-first-out basis, except to the extent that bundling orders would improve efficiency. "Partial fills" resulting from grouped trades are permitted as long as the firm's policy for allocating these trades is shared with clients and prospective clients.
Which of the following is not a commonly perceived benefit of the GIPS standards? Comparability of results across managers that claim compliance Adherence to regulatory requirements Increased confidence by investors and beneficiaries
adherence to reg requirements. GIPS isn't a regulator requirement
Under IFRS, a transaction that requires the leased asset to be recorded on the lessor's balance sheet is most likely: a finance lease. an operating lease. either a finance lease or a sales-type lease.
an operating lease if it's classified as a finance lease it would be transferred to the lessee's balance sheet.
Cheryl Regan, CFA, manages investments for individual investors. Recently, Regan was allocated shares in an initial public offering (IPO), and she distributed them to all of her clients with an investment policy statement (IPS) indicating that this was appropriate. One such client, Aaron Jefferson, has not met with Regan since his IPS was last updated two years ago. Since that time, during which he has had no communication of any kind with Regan, Jefferson has divorced and his disposable income has decreased significantly. Regan has least likely violated the CFA Standards with respect to: suitability. loyalty, prudence, and care. communication with clients and prospective clients.
communcation with clients and prospective clients - since this deals with actual communication. She broke the suitability by not meeting with her client for reassessing his information and not updating the IPS. Which needs to be updated annually. She broke the Loyalty, Prudence, and Care by not meeting with Jefferson over the past two years.
An analyst is valuing equities issued by two companies in the retail sector. Company A is based in the United States and reports in accordance with US GAAP. Company B is based in France and reports in accordance with IFRS. Which of the following statements is most accurate? Company A must report carrying amounts based on the cost model Company A may report carrying amounts based on the revaluation model Company B must report carrying amounts based on the revaluation model
company A must report carrying amounts based on the cost model The cost model requires companies to report carrying amounts that represent the difference between historical cost and accumulated depreciation or amortization. Reported carrying amounts based on the revaluation model represent the fair value of an asset at the time of its revaluation less any depreciation or amortization that has accumulated since that date. While US GAAP requires the use of the cost method and does not allow the use of the revaluation method, IFRS permits companies to choose either of these methods.
Which of the following statements is most accurate? Once the economy moves into the contraction phase of a typical business cycle, inflation: eventually decelerates, but with a lag. remains moderate and may continue to fall. continues its deceleration, which began during the slowdown phase.
eventually decelerates, but with a lag. A weakening economy and activity measures that are below potential signal the beginning of the contraction phase of the business cycle. After achieving its fastest rate of growth during the slowdown phase, inflation eventually begins to decelerate during the contraction phase, but with a lag.
Which of the following statements is most accurate? Under IFRS, a deferred tax asset: must be classified as a current asset. must be classified as a noncurrent asset. may be classified as either a current asset or a noncurrent asset.
must be classified as a noncurrent asset since typically it's over one year in length. While, US GAAP classifies it by what the basis was. Meaning if it was derived from a current asset then it will be a current asset.
Decision makers who use a compliance approach are most likely to: avoid situational influences. oversimplify decision making. consider more factors than when using an ethical decision-making approach.
oversimplify decision making A compliance approach can oversimplify decision making and may not encourage decision makers to consider the larger picture. A strong compliance culture may be a good start in developing an ethical culture but can become another situational influence that may result in employees failing to consider other important factors.
The process of testing a firm or asset owner that claims compliance with the GIPS standards is referred to as a: verification. validation. certification.
verification. A is correct. Verification is the process of testing a firm or asset owner that claims compliance with the GIPS standards, in accordance with the required verification procedures of the GIPS standards.
