CFA Practice Question

There are 534 practice questions for this study session.

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.
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