CFP Mock Practice Test

1. When an ARM is said to have a _____ cap, this means that there is a 2 percent maximum interest rate increase every year, and 6 percent over the life of the loan.

6/2

2/6

2+6

1/9

When an ARM is said to have a 2/6 cap, this means that there is a 2 percent maximum interest rate increase every year, and a 6 percent maximum interest rate increase over the life of the loan. This cap provides protection to borrowers by limiting the amount their interest rate can increase, ensuring that their monthly mortgage payments do not become unaffordable.

Explanation

When an ARM is said to have a 2/6 cap, this means that there is a 2 percent maximum interest rate increase every year, and a 6 percent maximum interest rate increase over the life of the loan. This cap provides protection to borrowers by limiting the amount their interest rate can increase, ensuring that their monthly mortgage payments do not become unaffordable.

2. Which code of ethics rule asserts that a financial planner should not solicit clients through and false or misleading communications or advertisements?

Rule 101

Rule 102

Rule 103

Rule 104

Rule 101 asserts that a financial planner should not solicit clients through any false or misleading communications or advertisements. This means that they should not make any false claims or provide misleading information in order to attract clients. This rule is important in ensuring transparency and honesty in the financial planning profession, as it aims to protect the interests of clients and maintain the integrity of the industry.

Explanation

Rule 101 asserts that a financial planner should not solicit clients through any false or misleading communications or advertisements. This means that they should not make any false claims or provide misleading information in order to attract clients. This rule is important in ensuring transparency and honesty in the financial planning profession, as it aims to protect the interests of clients and maintain the integrity of the industry.

3. A ______ is the right of an employee to receive cash and/or stock equal to the increase in the value of the company's stock after the date of purchase.

Stock appreciation duty

Stock appreciation right

Stock appreciation purchase

Stock appreciation option

A stock appreciation right is a form of compensation offered to employees, granting them the right to receive cash and/or stock equal to the increase in the value of the company's stock after the date of purchase. This means that if the stock price goes up, the employee can benefit from the increase in value by receiving additional cash or stock. It is a way for companies to incentivize and reward their employees for contributing to the company's success.

Explanation

A stock appreciation right is a form of compensation offered to employees, granting them the right to receive cash and/or stock equal to the increase in the value of the company's stock after the date of purchase. This means that if the stock price goes up, the employee can benefit from the increase in value by receiving additional cash or stock. It is a way for companies to incentivize and reward their employees for contributing to the company's success.

4. A ______ statement forecasts future balance sheets and cash flow statements.

Cash flow

Balance sheet

Pro forma

Finance sheet

A pro forma statement is a financial statement that projects future balance sheets and cash flow statements. It is used to estimate and forecast the financial performance of a company based on assumptions and hypothetical scenarios. This type of statement is commonly used in financial planning, budgeting, and decision-making processes to assess the potential impact of different business strategies and scenarios on the company's financial position.

Explanation

A pro forma statement is a financial statement that projects future balance sheets and cash flow statements. It is used to estimate and forecast the financial performance of a company based on assumptions and hypothetical scenarios. This type of statement is commonly used in financial planning, budgeting, and decision-making processes to assess the potential impact of different business strategies and scenarios on the company's financial position.

5. The objective of a matching principle is:

To accurately tabulate taxes

To provide relevant information in the same period

Recognize expenses in the same period in which income is earned

All of the above

The objective of a matching principle is to recognize expenses in the same period in which income is earned. This principle ensures that expenses are properly matched with the revenues they generate, resulting in accurate financial statements. By matching expenses with the corresponding revenues, the matching principle provides relevant information in the same period, allowing for better decision-making and analysis. It also helps in accurately tabulating taxes by providing a clear picture of the financial performance for a specific period.

Explanation

The objective of a matching principle is to recognize expenses in the same period in which income is earned. This principle ensures that expenses are properly matched with the revenues they generate, resulting in accurate financial statements. By matching expenses with the corresponding revenues, the matching principle provides relevant information in the same period, allowing for better decision-making and analysis. It also helps in accurately tabulating taxes by providing a clear picture of the financial performance for a specific period.

6. What is the positive value of the residual if we add back the depreciation expense in a closing book value of fixed assets and deduct it from the opening balance of fixed assets?

Addition of assets

Deletion of assets

Multiplication of assets

None of the above

By adding back the depreciation expense to the closing book value of fixed assets and deducting it from the opening balance of fixed assets, we are essentially reversing the effect of the depreciation expense. This means that we are increasing the value of the fixed assets, leading to an addition of assets. Therefore, the positive value of the residual in this scenario would be the addition of assets.

Explanation

By adding back the depreciation expense to the closing book value of fixed assets and deducting it from the opening balance of fixed assets, we are essentially reversing the effect of the depreciation expense. This means that we are increasing the value of the fixed assets, leading to an addition of assets. Therefore, the positive value of the residual in this scenario would be the addition of assets.

7. The Bankruptcy Code was established by Congress in 1978 in accordance with Article I, Section _____ of the Constitution.

7

8

9

10

The Bankruptcy Code was established by Congress in 1978 in accordance with Article I, Section 8 of the Constitution. This section grants Congress the power to make laws regarding bankruptcy.

Explanation

The Bankruptcy Code was established by Congress in 1978 in accordance with Article I, Section 8 of the Constitution. This section grants Congress the power to make laws regarding bankruptcy.

8. If the expected return on your treasury stock is 9% and the expected return on your market portfolio is 11%. With a beta coefficient of 1.1, what would be the expected return on the stock?

10.5%

11.5%

12.6%

13%

The expected return on a stock can be calculated using the formula: expected return = risk-free rate + beta coefficient * (expected return on market portfolio - risk-free rate). In this case, the risk-free rate is not given, so we cannot calculate the exact expected return. However, we can determine that the expected return on the stock would be higher than the risk-free rate (9%) but lower than the expected return on the market portfolio (11%). Therefore, the closest option to this range is 11.5%, which would be the expected return on the stock.

Explanation

The expected return on a stock can be calculated using the formula: expected return = risk-free rate + beta coefficient * (expected return on market portfolio - risk-free rate). In this case, the risk-free rate is not given, so we cannot calculate the exact expected return. However, we can determine that the expected return on the stock would be higher than the risk-free rate (9%) but lower than the expected return on the market portfolio (11%). Therefore, the closest option to this range is 11.5%, which would be the expected return on the stock.

9. Which of the following is a noncash expense?

Net increase in liability

Disposal of property and equipment

Depreciation expense

All of the above

Depreciation expense is a noncash expense because it represents the allocation of the cost of an asset over its useful life. It is a way to account for the wear and tear, obsolescence, or decrease in value of an asset over time. Although depreciation is recorded as an expense on the income statement, it does not involve an actual cash outflow. Instead, it is a way to recognize the decrease in the value of an asset over time and allocate that decrease as an expense on the financial statements.

Explanation

Depreciation expense is a noncash expense because it represents the allocation of the cost of an asset over its useful life. It is a way to account for the wear and tear, obsolescence, or decrease in value of an asset over time. Although depreciation is recorded as an expense on the income statement, it does not involve an actual cash outflow. Instead, it is a way to recognize the decrease in the value of an asset over time and allocate that decrease as an expense on the financial statements.

10. When should revenue be recognized in general?

When goods have been delivered

When it is virtually certain the amount will be collected

When related expenses incurred to generate the revenue

When goods have been manufactured

Revenue should be recognized when it is virtually certain that the amount will be collected. This means that the company should only recognize revenue when there is a high probability of receiving payment for the goods or services provided. This is important for accurate financial reporting and to ensure that revenue is not overstated. Recognizing revenue before it is virtually certain to be collected could result in misleading financial statements and potential issues with cash flow.

Explanation

Revenue should be recognized when it is virtually certain that the amount will be collected. This means that the company should only recognize revenue when there is a high probability of receiving payment for the goods or services provided. This is important for accurate financial reporting and to ensure that revenue is not overstated. Recognizing revenue before it is virtually certain to be collected could result in misleading financial statements and potential issues with cash flow.