- 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
If a firm wishes to be conservative in its recognition of depreciation expense, which of the following is true?
II. Shorter lives should be used.
III. Lower salvage values should be used.
I. Higher salvage values should be used.
II. Shorter lives should be used.
III. Lower salvage values should be used.
Correct Answer: II and III
Using shorter lives and lower salvage values will yield larger depreciation expenses, which is more conservative.
User Contributed Comments 9
| User | Comment |
|---|---|
| kalps | SHORTER LIVES AND HIGHER SALVAGE VALUE = CONSERVATIVE |
| gjwhite | It is Lower Salvage Value (not higher)= conservative See top of p. 388 of White Sondhi and Fried. |
| LogicMan | yes, lower. the question is correct. |
| rainatt | conservative means more depreciation expenses |
| airborne | Kalps the answer is shorter life and LOWER salvage value |
| thud | Conservative = lower net income |
| viannie | conservative => reported income is lower => deprec expense is higher => achieved by shorter deprec. life & lower s.v. In addition, lower s.v. = a conservative approach besides getting a higher deprec. expense |
| quanttrader | sld = [(depreciable value - salvage value) / t)]. conservative = higher sld. |
| khalifa92 | higher depreciation amount higher conservatism higher tax deductibles |