- CFA Exams
- CFA Exam: Level I 2021
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 27. Income Taxes
- Subject 5. Recognition and Measurement of Current and Deferred Tax
CFA Practice Question
If a large part of a firm's deferred liabilities will not reverse, the firm's debt to equity ratio will ______.
B. rise
C. remain the same
A. fall
B. rise
C. remain the same
Correct Answer: A
Deferred assets/liabilities can be classified as assets, liabilities, or equity. The test is whether the deferred taxes are expected to reverse. If they are not expected to reverse in the future, then they should be classified as equity. This decreases the debt-to-equity ratio.
User Contributed Comments 4
| User | Comment |
|---|---|
| Crown01 | Cool |
| cslau83 | Only if the analyst chose to regard is as equity. |
| Inaganti6 | now only if the questions in the real exam would be as easy as this -_- |
| Freddie33 | I still got it wrong |