- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 20. Equity Valuation: Applications and Processes
- Subject 3. The Valuation Process
CFA Practice Question
Which of the following observations signal(s) poor quality of figures provided in the income statement and the balance sheet?
II. Use of special purpose entities (SPEs).
III. Short depreciable lives.
IV. Low pension discount rate.
I. Bill-and-hold sales.
II. Use of special purpose entities (SPEs).
III. Short depreciable lives.
IV. Low pension discount rate.
Correct Answer: I and II
II: Income may be overstated by sales to the special purpose entity or a decline in the value of assets transferred to the SPE.
Short depreciable lives and low pension discount rate are examples of conservative accounting estimates and assumptions.
I recognizes revenue early.
II: Income may be overstated by sales to the special purpose entity or a decline in the value of assets transferred to the SPE.
Short depreciable lives and low pension discount rate are examples of conservative accounting estimates and assumptions.
User Contributed Comments 4
| User | Comment |
|---|---|
| johnnybee | good question |
| ssradja | agreed |
| ashish100 | "The discount rate refers to the level at which future pension obligations are discounted to their present value. A higher discount rate reduces the reported benefit obligation, while a lower discount rate raises the obligation" - danger zone |
| Levancho | Why not III and IV? I understand they are not part of an aggressive accounting practices, but does not conservative assumptions also contribute to the lower quality of the statements? |