CFA Practice Question
The sale or retirement of assets ______
II. lowers the quality of earnings because the gains and losses resulting from asset sales are considered nonrecurring.
III. is an indicator of trends in capital spending.
I. that results in consistent gains suggests that the company's depreciation method is conservative.
II. lowers the quality of earnings because the gains and losses resulting from asset sales are considered nonrecurring.
III. is an indicator of trends in capital spending.
A. I and II.
B. II and IIII.
C. I, II and III.
Explanation: The analyst should examine gains or losses when selling or retiring assets for all of these reasons.
User Contributed Comments 10
| User | Comment |
|---|---|
| lwang014 | In contrast,we have double-decling balance method (ddb) which would be considered with aggressive. |
| andrewsutton | No. The question is correct. Conservative means depreciates quickly, becuase it depresses revenue more. You are being 'conservative' with the resulting revenue figure. |
| bawejate | being conservative applies that you are reporting kind of the worst-case-scenario |
| theBooty | faster you depreciate asset --> more conservative |
| steved333 | Somebody please explain to me how it's an indicator of capital spending... |
| damonb | Normally selling or retiring of assets implies that they are being replaced by new assets, which requires capital spending |
| jonnyp | depreciating faster is more aggressive not conservative |
| achoi0 | faster depreciation leads to lesser earnings which is more conservative reporting |
| tommyguard3 | Thanks everyone, I was confused because I assumed conservative meant conservative with the depreciation number ie. lower, not the revenue figure. The explanation didn't really explain that but your comments did. Big help. |
| braundjm22 | Faster depreciation would make the asset have a lower Book Value when it is sold (if it was sold before the retirement date, since all dep methods equal out in the end), resulting in a higher gain. (Gain = Price sold for (market value) - Price on books (carrying value) . Therefore I would think consistent gains on sale/retirement of assets would indicate an accelerated depreciation method. Not sure if an accelerated dep method would be considered conservative or aggressive though |