- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 5. Expense Recognition
CFA Practice Question
Reported earnings are more reliable indicators of a firm's fundamental value when they include ______.
A. losses from discontinued operations and gains on asset sales
B. changes in accounting principle
C. realistic estimates of warranty expenses
Explanation: This is a component of permanent earnings since it is expected to persist into the future. The better the estimate of warranty expenses, the more reliable the reported earnings.
User Contributed Comments 3
| User | Comment |
|---|---|
| czar | Can someone pls help confirm if the contingent loss from warranties is estimated in the IS and BS? and If in BS (as i was thinking) then why would it effect reported earnings? Pls explain |
| chandsingh | hi czar, im not an expert but as far as i understand this, warranty expenses are just expensed as a provision so they will hit income stt first and the rest regarding BS im uncertain. After all a lot of items in BS if underestimated or overestimated get recognised in IS as losses or gains.shld be the same here |
| GBolt93 | actual cost as would be recorded on the balance sheet, but the expense of the warranty would be recognized straight line as it is earned. E.g. charge 100 for a 3 year warranty with expected liability of 90. Each year you'd recognized $30 of warranty expense regardless of actual costs incurred, and $33.33 revenue which would be shown in IS. |