- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 7. Analysis of Long-Term Assets
- Subject 2. Impairment of Assets
CFA Practice Question
Which of the following statements is (are) true with respect to the effects a write-down will have on financial statements and corresponding financial ratios?
II. Asset turnover ratios will increase after the write-down.
III. Following a write-down, future depreciation expenses will become higher.
IV. The debt-to-equity ratio will decrease once a company has written down its impaired assets.
I. The years after the write-down will see a higher return on equity than would be the case if there were no asset write-downs.
II. Asset turnover ratios will increase after the write-down.
III. Following a write-down, future depreciation expenses will become higher.
IV. The debt-to-equity ratio will decrease once a company has written down its impaired assets.
Correct Answer: I and II
I is true and III is incorrect because the year after the write-down, the resulting depreciation expense will be lowered and the corresponding income figures will have increased. Also, with a write-down, asset values and consequently, equity values, will have dropped. Hence, an improved income and a lowered equity will result in a higher ROE.
IV is incorrect because once an asset is written down, the value of both assets and equity will drop. Consequently, ratios such as debt-to-equity will increase.
User Contributed Comments 5
| User | Comment |
|---|---|
| shalinic | WHen you have an asset write down, is there no loss recorded on the income statement? |
| cjyoung316 | The write down is an unusual or inferquent item so they are reported pretax in the income statement the year it occurs. Option I states in the years after, so depreciation expense will be lowered and therefore higher net income, as discussed above. The write down would have already been accounted for in the year it occurred and not in subsequent years. |
| 2014 | Easy to remember = after write down assets decrease. we learned before, Net assets = Shareholders equity. So if net assets decrease shareholder eqquity decreases. This means debt/equity ratio declines |
| fredpat01 | 2014 I guess you meant debt/equity increases at the end |
| Freddie33 | There's always so many errors in the comment sections sometimes it's hard to believe it's not the CFA just trying to confuse us more #donttrustanyone |