CFA Practice Question

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CFA Practice Question

If a firm wishes to be conservative in its recognition of depreciation expense, which of the following is true?

I. Higher salvage values should be used.
II. Shorter lives should be used.
III. Lower salvage values should be used.
Correct Answer: II and III

Using shorter lives and lower salvage values will yield larger depreciation expenses, which is more conservative.

User Contributed Comments 9

User Comment
gjwhite It is Lower Salvage Value (not higher)= conservative See top of p. 388 of White Sondhi and Fried.
LogicMan yes, lower. the question is correct.
rainatt conservative means more depreciation expenses
airborne Kalps the answer is shorter life and LOWER salvage value
thud Conservative = lower net income
viannie conservative => reported income is lower => deprec expense is higher => achieved by shorter deprec. life & lower s.v.

In addition, lower s.v. = a conservative approach besides getting a higher deprec. expense
quanttrader sld = [(depreciable value - salvage value) / t)]. conservative = higher sld.
khalifa92 higher depreciation amount higher conservatism higher tax deductibles
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