CFA Practice Question
If goodwill is deemed to be impaired, ______
II. the charge reduces current earnings.
III. assets are reduced.
I. it is charged against income in the current period.
II. the charge reduces current earnings.
III. assets are reduced.
Correct Answer: I, II and III
User Contributed Comments 7
| User | Comment |
|---|---|
| Htoon | can somebody explain the relationship among these three? |
| Smurfy | when the impairment of goodwill is charged against income, expenses for the current period rise, so current earnings will fall.. and when expenses rise, we have to pay for them with current assets (ideally cash) so current assets fall as well |
| madhi | Smurfy, When goodwill is impaired, Non-current assets are reduced not current assets. The goodwill account on the balance sheet goes down by the same amount expensed in the income statement (i.e. the impairment charge). The impairment charge is a non-cash expense, so cash has nothing to do with this. |
| pappoo | You are right Madhi |
| moneyguy | So III would be false if it stated "current assets". |
| gill15 | Super Madhi...wasnt thinking that at all |
| ascruggs92 | moneyguy, yes, that is correct. The only asset that will be reduced from an impairment of goodwill is the goodwill itself |