- 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 longer depreciable life will cause ______
II. depreciation expense to be higher each period.
III. more costs to be allocated each period.
IV. asset turnover ratios to be lower.
I. depreciation expense to be lower each period.
II. depreciation expense to be higher each period.
III. more costs to be allocated each period.
IV. asset turnover ratios to be lower.
Correct Answer: I and IV
A longer life will cause depreciation expense to be lower each period, as it is spread over a longer period of time. This will cause asset turnover ratios to be lower.
User Contributed Comments 7
| User | Comment |
|---|---|
| gjwhite | Lower depreciation expense will cause the book value of assets to be higher each period than they would be otherwise. Therefore, (net sales)/assets has a larger denominator, hence, asset turnover is LOWER. |
| LogicMan | Agree with gjwhite. IV is also correct. |
| rainatt | low depreciation=higher asset=lower asset turnover |
| o123 | asset TO = Net sales / Avg Assets |
| atemple315 | Consider a depreciable life of 5 years (scenario A) vs 10 years (scenario B) on a asset valued at $10,000 with $0 salvage value. On a straight line depreciation basis:- Scenario A - the expense would be $2,000 per year (period)for 5 years; Scenario B - the expense would be $1,000 per year for 10 years; Whilst answer I is correct for the first 5 years of the assets life, it is incorrect for the second 5 years, under scenario B - I disagree with the answer I - as this states under "Each" period. What does anyone else think? |
| johntan1979 | atemple315: You think too much and too hard. $2,000 and $1,000, which one is lower? |
| davidkhang | @johntan1979 LOL |