CFA Practice Question

There are 89 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the adjustments that an analyst should make to a company's income statements before interpreting them?

I. The cost of goods sold should be restated in order to reflect its value as if the FIFO method was used.
II. Depreciation should be completely eliminated from income.
III. When analyzing a single period, nonrecurring events should be eliminated completely.
IV. If there are off-balance sheet liabilities, their respective interest obligations should be incorporated into the corporate earnings.
A. I and IV
B. III and IV
C. II and III
Explanation: I is incorrect because the cost of goods sold should be restated in order to reflect its value as if the LIFO method was used. Costs would be more current if the last items that the firm bought as inventory were passed through on to costs.

II is incorrect because an analyst needs a benchmark as to how much wear and tear is taking place on the company assets. Hence, instead of erasing depreciation, an analysts should substitute the reported depreciation with the real life depreciation that's taking place on the assets.

User Contributed Comments 1

User Comment
Trev186 eliminating all nonrecurring event "Completely" would not be proper because the analyst may find that one of the non-recurring events may be misclassified
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