- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 5. Analyzing Statements of Cash Flows II
- Subject 1. Evaluating Sources and Uses of Cash
CFA Practice Question
A change in accounting principle is treated as a value-irrelevant component of earnings. True or False?
Correct Answer: True
A change in accounting principle is value-irrelevant because it does not result in a future cash flow.
User Contributed Comments 4
| User | Comment |
|---|---|
| danlan | What does this mean, "value-irrelevant component of earnings"? |
| ehc0791 | It means the future value of a company should not depend on the way the accounting number being massaged |
| johntan1979 | I think this view is not very accurate, because say a company changes from FIFO to LIFO, the company pays less of its earnings to Uncle Sam. The company gets to keep more of its earnings at the end of the day. So by saying changes in accounting principles is value-irrelevant is not entirely true, because it does create some value for some cases like the example I gave. |
| mswaby01 | However it does not impact cash flow which is the basis of future value |