CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Asset revaluation can improve ______.

I. leverage, such as the asset/debt ratio
II. profitability, such as ROE
III. cash flows, such as CFO
A. I and II
B. I, II and III
C. II only
Explanation: It does not affect cash flows.

User Contributed Comments 12

User Comment
jdk137 I thought that assets should not be revalued higher.
cong Reversal is only prohibited under US GAAP.
jpducros Revaluation of assets are made against Equity. How could RoE improve if Equity is higher ?
oregan because both profit and equity will increase, and ROE will likely increase (assume you have a bigger E than R). e.g. Suppose the ROE is 10/100, you add 5, it becomes 15/105. Do the math.
cslau83 profit does not increase. Revaluation goes directly into equity without passing through income.
cslau83 Sorry, UNLESS it is revalue down first then upwards again
Paulvw Only future cash flows are affected through deferred tax assets and depreciation changes.
NIKKIZ Why aren't cashflows affected? If an asset is written down, there is a charge in the P&L which reduces earnings and taxes, thus increasing cashflows. Where am I going wrong on this assumption? IS the problem perhaps my interpretation of revaluation - which should mean that the asset can only be revalued upwards? Any suggestions anyone?
siggarusfigs yea i mean what about depreciation? if you revalue upwards shouldn't that increase, and change cash flows?
challenge11 cong: No reversals are permitted under US GAAP (except for long lived assets held for sale)
daverco It's a non-cash charge that would be added back to operating cash flow, thus leaving the cash flow balance unchanged relative to a situation in which there wouldn't be a revaluation.
taz2013 I don't understand how ROE can increase. On one hand Equity is increasing due to accounting for Revaluation through Equity reserve. And then depreciation expense is going up due to a higher book value, in turn reducing Net Income. So in fact ROE should be decreasing!
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