- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 7. Analysis of Long-Term Assets
- Subject 6. Depreciation Methods
CFA Practice Question
A significant change in the estimate of the salvage value of an asset to a much lower value will cause ______
B. depreciation expense to decrease.
C. return on assets to increase in the period of the change.
A. income to decrease in the period of the change.
B. depreciation expense to decrease.
C. return on assets to increase in the period of the change.
Correct Answer: A
The lower salvage value will cause the depreciable base to be larger, which will cause more depreciation to be expensed each period.
User Contributed Comments 8
| User | Comment |
|---|---|
| stranger | less salvage means less return from the sale of asset, hence more goes towards depn and causes reduced income |
| rainatt | ROA |
| mtcfa | Since ROA is also not included, then we are to assume that the effect on net income (numerator) is greater than that of average assets (denominator). I guess this makes sense since we are looking at average assets. |
| mordja | Average assets has nothing to do with it. The proportional effect of depreciation on income is typically greater than the proportional effect on total assets. As assets are typically far greater than net income (ROA typically less than 1) this is logically correct. |
| bundy | Depreciation amount will be greater as there is more value to the asset each year if the salvage value is extended. Greater Dep exp means lower Net Income |
| investoprenuer | ROA will decrease rather than increase due to the proportion. |
| farhan92 | salvage value decrease - numerator is larger - dep is larger dep is the bad guy..and more dep reduces income |
| Inaganti6 | Skip the comments if you get the answer right ! |