- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 18. Understanding Income Statements
- Subject 4. Non-Recurring Items and Non-Operating Items
CFA Practice Question
If non-recurring charges are really prior year expenses taken too late, then the practice of ignoring non-recurring charges and focusing on recurring operating income results in an ______.
A. underestimation of a firm's assets
B. overestimation of a firm's earnings trend
C. overestimation of a firm's assets
Explanation: If non-recurring charges are really prior year expenses taken too late, then the practice of ignoring non-recurring charges and focusing on recurring operating income results in an overestimation of a firm's earnings trend.
User Contributed Comments 5
| User | Comment |
|---|---|
| americade | i sure can't, it's counterintuitive if they didn't adjust prior yr's earnings down by ignoring non-recurring charges then last yr's earnings were overstated and the trend understated. |
| Shelton | ignoring -1 means overestimate by +1 |
| malawyer | its also overestimating assets (i.e. increase ret. earnings in equity) |
| charlie1 | No lawyer. The charges are still recognized but as non-recurring instead of recurring. The assets remain the same. The earnings trend, which is asked in this question, does not include non-recurring income. |
| nostalgia | thanks charlie1, your explanation is really helpful. |