CFA Practice Question

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CFA Practice Question

Allocating too much value to depreciable / amortizable assets leads to:

I. higher assets.
II. higher future operating expense.
III. higher future cash flows.
Correct Answer: II and III

It does not necessarily lead to higher assets as the value would have gone to another asset category: goodwill. Total assets rise only to the extent that external financing is used (either debt or equity). However, this strategy does change the composition of assets.

User Contributed Comments 8

User Comment
danlan2 Higher expense==>lower income==>lower tax==>higher cash flow
bmeisner It shouldn't affect cash flows in my opinion, since depreciation and higher COGS due to inventory revaluations are non-cash items. Any thoughts?
gardecki think taxes brmeisner
treakj danlan2, you're genius! I totally forgot that the cash flow can be the same, but the tax will change. Gosh.
REITboy Yeah, but isn't depreciation a non-operating expense? So, why is II right?
REITboy Nevermind... confusing non-operating with non-cash after 4 hours straight on AnalystNotes!
epfrndz Good one danlan2!
jimmyvo This question separates the men from the boys.
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