- CFA Exams
- CFA Level I Exam
- Study Session 9. Financial Reporting and Analysis (4)
- Reading 29. Financial Reporting Quality
- Subject 4. Detection of Financial Reporting Quality Issues
CFA Practice Question
When analyzing a firm's adjusted EBITDA, an analyst should examine the list of items that are excluded from net income. Which of the follow items is LEAST LIKELY to be examined?
A. Depreciation charge
B. Litigation costs
C. Loss/gain on debt extinguishments
Explanation: Taxes, interest costs, depreciation, and amortization are excluded from net income in the EBITDA calculation.
User Contributed Comments 5
| User | Comment |
|---|---|
| NOBA | a very good question! |
| dquang225 | If Depreciation is excluded. Isn't it MOST LIKELY to be examined?? |
| ecapocas | Yeah this is.... If you're an analyst, you will ALWAYS want to sanity check depreciation. It's a favorite place to hide earnings management (choice of depreciation method, etc) so you need to check and make sure it's consistent with industry and historical patterns. |
| lawlee | I don't understand the logic of this answer, anyone please give your take! |
| litomalagg | Well, i guess that because litigation costs and loss/gains on debt extinguishments are recognized in the income statement, they make parte of the "gross" EBITDA. Those transactions aren´t part of the normal operations of the company but involves cash to some extent, so when you´re analyzing an ADJUSTED EBITDA, you should analyze if those items will occur again at some point. |