CFA Practice Question

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CFA Practice Question

The recognition of liabilities often results in ______.

I. the recognition of expenses
II. a more conservative representation of financial position
III. a decrease in net income
IV. a decrease in ROI
Correct Answer: I, II, III and IV

User Contributed Comments 9

User Comment
jooey ROI = Return on Invest
abimashi can someone please explain why the recognition of liabilities often results in a decrease in ROI? thanks.
Evgenia1 Recognition of liabilities will decrease the realised final value at the end of the investment horizon. Therefore, the decreased final value obtained from the investment devided by the initial investment value minus 1 (Vf/Vi-1) will be smaller then ROI derived from the final value with non-recognized liabilities. (hope that will help)
dipuo The recognition of expenses?
Lucho Recognizing liabilities becasue of expenses will lead to a decrease in net income therefore a decrease in ROI..
sant0sh Why option 2 is also true. Can someone explain.
Oarona When liabilities are not recognised in a timely fashion, the balance sheet will not present a true picture of the financial position. Therefore all liabilities need to be recognised in order to get a more representative picture of the financial position
gill15 I. seems odd to me. For eg, When I think of Accrued Expenses, I first would recognize the expense and then would recognize the Liability on the BS(Eg. wages payable, salaries payable.etc).

The way its worded is the other way around. I'll go with the answer and remember it but right now I'm not agreeing or following properly.
davcer Net income and ROI move together
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