Qestions regarding Schweser Book 7 for level 1

could someone possibly tell me how different the questions on book 7 will be from the real exam? I am so losing confidence in doing the practice on that book, cuz I only got 60% right on Exam 2- afternoon session. Plus, I am totally screwd on the Financial Statement Analysis part of that one. I got only 14 right out of 32, through the overall result was balanced out by other parts. If the real exam is just like that, how can I possibly pass it. How do you guys feel?

might help, if we went over some of those FSA questions here on the forum, so we can then work the problems out together. That would be a healthy discussion.

use this thread and post some of the questions. it’s a benefit for all of us…

book 7 is far more wordy and obscure than the actual exam. how’d you do on book 6? I think that was a pretty good indication of the real test in terms of difficulty, although the wording b/t schweser and the actual test is still a bit different. if you’re in the 60’s on book 7, don’t freak out. if you’re in the 60’s on book 6, i’d go back and review hard what you got wrong… ideally you’d want to be above 70 on book 6 tests going into the exam to feel pretty confident that you’ve got it. that all said- learn as much FSA as you can- it’s the biggest part of the test. those ethics 17 paragraph questions in book 7… you won’t see that much in terms of words on the CFA test. CFA test has TONS of 2 part questions though. they stink in book 6/7, but they’re there just as much if not more on the actual exam. get used to those. econ was tough w/ tons of 2 parters.

Thank you, bannisja! That’s very informative. I didn’t feel that much stressful on Econ part of book 7. But I Do feel so in reading tedious ethics paragraphes, though they are not entirely undoable. In term of FSA, I just feel like What the hell! So easy to get wrong answers, even you got 99% reasoning right. here are some tricky questions 01 Royt Corp. has had a 2-year period of very depressed earnings. This has led Royt’s management to believe that it will be especially important to meet analysts’ earnings estimates for the next several quarters. An accounting strategy that is Most likely to help meet this goal is to A. decrease asset salvage values B. increase asset salvage values C. Increase the use of operating leases D. change to the average cost inventory method. 02 AG company mines silver. AG recently purchased a new mine for $270M. The mine has estimated reserves of $45 M ounces of silver and a residual value of $45M. during the past years, AG mined 2.5M ounces of silver, but sold only 2M ounces. Calculate AG’s depletion charge per ounce and the current year’s depletion to be deducted from revenues. Depletion charge ; year depletion charges. A. $5 per ounce; $10 M B. $6; $10M C. $5; $12.5M D. $6; $12.5M 03 A company owns a $100,000 municipal bond, with a 5% coupon and has an effective tax rate of 50% and a statutory rate of 40%. The deferred tax created each year by this bond is A. $2500 B. $2000 C. $500 D. $0 04 A firm has increased its ROE through large stock repurchasing even though asset turnover has declined. THis should be viewed as A. positive, since a higher ROE means a higher growth rate B. positive, since margins must also be increasing C. negative, since margins must be falling D. negative, since there is a limit to the increase in financial leverage.

01 Royt Corp. has had a 2-year period of very depressed earnings. This has led Royt’s management to believe that it will be especially important to meet analysts’ earnings estimates for the next several quarters. An accounting strategy that is Most likely to help meet this goal is to A. decrease asset salvage values B. increase asset salvage values C. Increase the use of operating leases D. change to the average cost inventory method. Decrease Asset salvage values ¡V would increase depr. So reduce income. Increase op. leases ¡V would increase expense, reduce income. Increase asset salvage values ¡V would reduce depr, increase NI. Changing to avg cost inv. Method just puts them between LIFO and FIFO, in the absence of what the co. had before ¡V not sure what this would do. Based on this would go with B „³ Increase asset salvage values 02 AG company mines silver. AG recently purchased a new mine for $270M. The mine has estimated reserves of $45 M ounces of silver and a residual value of $45M. during the past years, AG mined 2.5M ounces of silver, but sold only 2M ounces. Calculate AG’s depletion charge per ounce and the current year’s depletion to be deducted from revenues. Depletion charge ; year depletion charges. A. $5 per ounce; $10 M B. $6; $10M C. $5; $12.5M D. $6; $12.5M Depletion charge per oz. = (275-45)/45 = 5 Charge for this year = 2.5 * 5 = 12.5 Choice C 03 A company owns a $100,000 municipal bond, with a 5% coupon and has an effective tax rate of 50% and a statutory rate of 40%. The deferred tax created each year by this bond is A. $2500 B. $2000 C. $500 D. $0 Bond Interest = 100000 * .05 = 5000 Deferred tax = 5000 * (.5 - .4) = 500 Choice C 04 A firm has increased its ROE through large stock repurchasing even though asset turnover has declined. THis should be viewed as A. positive, since a higher ROE means a higher growth rate B. positive, since margins must also be increasing C. negative, since margins must be falling D. negative, since there is a limit to the increase in financial leverage. Would go with Choice D here.

all of those FSA q’s look like fair game to me. learn them, love them, live them. especially stuff like the last q with ratios, know what happens inside and out to everything with a shift in something else. don’t be scared of the weird questions in book 7 like which one of these isn’t a continuous market and it was new zealand or some country like that- sure, it’s in the materials, but if I were betting, I’d say the CFA probably won’t get that obscure. the ethics q’s are pretty straightforward wording-wise- study the handbook. you will see examples almost identical to the examples there. memorize GIPS stuff. you’ll get 4 or 5 questions on GIPS and you’ll kick y’self if you don’t know how many years you have to show a discontinued portfolio for or which of these isn’t one of the 7 or 9 principles of GIPS and it mentions VC, Real Estate investing, etc… and you miss an easy q because you forgot to memorize that all. those count just as much as a huge calculation problem, so don’t waste points. fight for every one. while i’m rambling, i’ll ramble more on tips- alt investments/derivatives- if you’re absolutely crunched for time, you might have to breeze over this stuff b/c they’re only gong to be maybe 10 questions a side or so on the test, but if you have the time, these are the easiest 10 points of your life. for the real estate stuff, there’s that 1 formula (can’t remember it now)- you’ll get a question on that. PM- know your SML and CML inside and out- those also are easy q’s if you review but they’ll be very fuzzy if you quickly just read through. take a good long qbank quiz on this and if you’re scoring well, you’re probably fine. this stuff i tended to forget quickly, so just review it with a big qbank quiz to make sure it’s sticking and you won’t see that many curveballs. FSA you either have it or you don’t. Quant you’ll be surprised at how little you’ll use your calculator and how many questions are either definition related or something along those lines. don’t only memorize formulas and plug/chug b/c on that section, it was a lot more conceptual than it was calculations. econ i swear was the trickiest section on the last test in terms of me flipping a coin b/t some of the 2 parters and wanting to second guess myself. somehow visualize all of the graphs and the movements if interest rates move or money supply moves or something moves… ok ramble over for now. good luck you guys. try to wrap up the “study” portion very soon and start banging out questions/tests- you have to get in that mode very soon to see where you stand and where you need to review most in the last few weeks.

1: B? 2: C? 3: D 4: D? I agree, these questions are a bit harder than the level in book 6. I have done all 3 book 6 que and averaged about 80% in FSA

  1. B. Increase salvage values -> Decrease in Depreciation -> Increase in NI 2. C. (270-45)/45 = $5 per ounce. If you MINE 2.5M ounces, depletion should be 2.5M *$5 = $12.5M 3. C. $100K bond with 5% coupon = $5K in interest. Effective rate on interest is $5K * 50% = $2.5K. Statutory Rate on interest is $5K * 40% = $2K. $2.5K - $2K = .5k 4. D. By elimination. Question: Am I safe to assume that we can’t draw a conclusion from C, because you can’t reason margins are falling simply because asset turnover has fallen?

CPK…Shouldn’t ans for 3 be D…zero impact on DT. I chose D because of the following 2 reasons 1) Its a municipal bond, likely to be tax exempt and thus would create a permanent difference. 2) Effective tax rate > Statutary tax rate, this points to the fact that income included in I/S that and thus subject to taxes (IT exp) > than taxable income. (Which would point towards the tax exempt bonds)

  1. B - increase asset salvage values They need to somehow improve their earnings and this can be done my reducing the salvage value, which inturn, decreases depreciation expense and hence increases net income. 2. C (purchase price - residual value)/reserves available for mning [Units-of-Production Method] Depletion = $(270 - 45)M/45M ounce = $5/ounce Current year Depletion charges = current year mining * Depletion Current year Depletion charges = 2.5M ounces * $5/ounce = $12.5M 3. D Munis are tax-exempt, so it is only going to cause permanent differenece, so 0 DTL. 4. will guess on B - Dinesh S

if you’re hitting 80’s in FSA on most of your practice tests, don’t just go to the test center, walk in there with a swagger and a look like “i got this”… you’re golden. that last one- it’d have to be B or D… i normally think ROE up as a good thing, but who knows, haven’t looked at this stuff in 5 months. 3rd one i think D- it’s a perm difference, no? munibond? i used to hate those deferred tax q’s. you guys should have confidence going in- if you dork out on this board, chances are you are studying also a ton and you’re in very good shape. i hope to see you all on the L2 board soon… i’m sure you’ll run circles around me in L2 as I have now had all this time off and can’t get back into study mode at all.

@ finance, the reason i did not chose C was because we know Asset turnover is falling (Sales / Assets). Asset turnover will decrease if a) Sales decrease b) Asset increase either case, this gives us no information about the margin, for all you know while sales are decreasing, the margin (Gross profit/sales) is going up (firm increased its price, qty demanded decreased). D, though not a slam dunk, seems like the least incorrect answer to me

> I agree, these questions are a bit harder than the > level in book 6. I have done all 3 book 6 que and > averaged about 80% in FSA Wow!! 80% @ FSA is asking for a little to much from my side. U seriously rock, u from Delhi? Happy Diwali bro… - Dinesh S

Delhi, yes, I agree. I originally WANTED it to be C, but I think D is the best. Straight from Schweser: "Sometimes the goodness of a ratio depends on the context. A high ROE that results from high profit margins or asset turnover is typically looked upon favorably. However, high ROEs that result from high levels of leverage are viewed more skeptically because of the additional risk of higher leverage.

The right answer for the first four is AADD And here is more 05 The choice of inventory accounting method will have substantial impact on the financial statement of anay corporation. Under centain circumstances, the divergence between LIFO and FIFO accounting results can be quite large. What type of company would have the largest difference in reported income as a result of using LIFO rather than FIFO? A. a rapidly growing medical equipment company B. a copper mining company C. A regulated gas utility company D. A company with a high inventory turnover ratio. 06 CC, CFA, is evaluating the semiconductor division of Mammoth Industries, a conglomerate. The division’s projected cash flows are riskier than Mammoth’s overall cash flow. Indicate whether CC should increase or decrease Mammoth’s weighted average cost of capital when evaluating the semiconductor division and state, yes or no, whether CC should use this same adjusted WACC for the free cash flow to equity valuation model he plans to use to value the division? Cost of capital ; valuation model A. increase; yes B, Decrease; Yes C. Increase; No D. Decrease; No 07 Most analysts believe the balance sheet is more informative when assets and liabilities are stated at fair value rather than historical cost. Althrough asset revaluation is not permitted under U.S GAAP, it is allowed under IAS GAAP. Under IAS 16, PP&E, which of the following is true? A. fixed assets must be reported at fair value less accumulated depreciation B. only certain items in an asset class must be revaluated and revaluations must be kept current C. A revaluation that reduces an asset below historical cost must be recognized in earnings. D. revaluations only impact equity when a reversal of a previous write-down occurs. 08 TI produces a sports car with a unique patented engine design. The company sold the sports car’s exclusive United Stated marketing rights to FP for $10M for the next fifty years. State the maximum life of TI’s design patent in the U.S and calculate FP’s minimum annual amortization cost. Design patent; Amortization cost A. 14 years; $200,000 B. 20; $200,000 C. 14; $250,000 D. 20; $250,000

I’m having flashbacks from last year’s level 1 already. For #3 in the first set: It is true that municipal bonds are generally tax-free, but they are not ALL tax-free. If the question tells you the asset has a tax rate, how are you supppsed to ignore that? The quesiton does not ask if the deferred amount is an asset or liability, either. It just asks for the absolute amount. I really can’t see how the answer isn’t C, but I guess that’s why I keep coming back. #1 - I only think A and B are viable answers (operating leases increase expeses, average cost method only smoothes income). My guess was B - what’s their reasoning on this? #2 - I initially thought it was A because I remembered the trick from last year how only natural resources that are sold/consumed are counted as depleted. #4 - D; margins can’t be determined and a declining asset turnover negates the theory of an increasing growth rate (perhaps temporarily).

  1. D 6. A 7. A 8. no idea I probably bombed them all, but I’m at work and literally did those in about 2 minutes Maybe I’ll get one right and feel better about myself!
  1. A - A is the only answer that would lead to a large difference in inventory amounts. High turnover would push the inventory costs through to be realized. 6. C - Use the adjusted WACC to forecast CFs, use the company WACC when they are realized. 7. A -Sounds logical, right??? 8. A - I don’t really know, but my guess is 14 years (20 seems too easy) and 10m/50 = 200k.

bannisja: you are right. Time management in the test will be crucial. I am still working on it. Spend too much time in calculation. Actually, take a closer look, there might be shortcut to avoid heavy calculation by comparing answers. I don’t know if I should pay more attention on these tricks? Any tips?