CFA Practice Question
When a long-term asset is written down due to an impairment of value, which of the following is true?
II. Stockholders' equity will decrease.
III. Net income will decrease.
I. Fixed assets will decrease.
II. Stockholders' equity will decrease.
III. Net income will decrease.
Correct Answer: I, II and III
Impairment will cause a loss to be recognized, which will decrease income and then stockholders' equity. The loss will also cause a write-down of the value of the assets.
User Contributed Comments 7
| User | Comment |
|---|---|
| Khadria | But in the subsequent years, income will increase because . . . the depreciation cost will be less! ! ! |
| nike | but the question asks the year when the asset is written down. don't over-complicate the issue, Khadria. |
| yonghui | yes, the question is good |
| cong | When fair value is not readily available, use pv of future cash flows as a proxy. |
| Paulvw | Good question. First year after an impairment, capitalization event or depreciation change is usually different from the remainder. |
| johntan1979 | Always assume what happens immediately, not what happens in subsequent years. |
| rjh512 | I. is wrong. A long-term asset could refer to an intangibile asset, not only fixed assets. Therefore, if an intangible asset is written down, it would not decrease fixed assets. Should only be 2,3. |