FSA, who's up for this one

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FisherSU

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IMD corp. has had a 2-year period of very depressed earnings. This has led IMD's management to believe that it will be especially important to meet analysts' earnings estimates for the next several quarters. An accounting strategy that is most likely to help meet this goal is to:

A. decrease asset salvage values
B. increase asset salvage values
C. increase the use of operating leases
D. change to the average cost inventory method


and the answer is...
 
that's what i thought map...

...and KJH...



Edited 1 time(s). Last edit at Thursday, June 5, 2008 at 10:10PM by FisherSU.
 
FisherSU Wrote:
-------------------------------------------------------
> IMD corp. has had a 2-year period of very
> depressed earnings. This has led IMD's management
> to believe that it will be especially important to
> meet analysts' earnings estimates for the next
> several quarters. An accounting strategy that is
> most likely to help meet this goal is to:
>
> A. decrease asset salvage values
> B. increase asset salvage values
> C. increase the use of operating leases
> D. change to the average cost inventory method
>
>
> and the answer is...


B or C works. op leases boost net income in early years. higher AV for depx purposes = lower dep X = higher net

BOOM

bring em on
 
Oh no:) this must be increasing the use of operating leases, operating leases have lower costs than capital leases:)) It is C?
 
the answer will surprise you ;>

...try to be a bit more creative
 
I think logically it would be B.

If you increase the salvage value, you automatically are going to be reducing the depreciation expense each period resulting in higher net income.

You cannot just make a decision to 'use more operating leases'. If any of the 4 criteria for a capital lease exists, you HAVE TO CAPITALIZE. You can't decide to just switch to an op lease because it's convenient!

The last item, about inventories, depends on what type of a cost environment you're operating in and what the company's current method of accounting is.

B is the only option that works!
 
don't tell me they want to get to some depressed earnings forecasted by analysts:)) in which case they would go for the average costing method:))



Edited 1 time(s). Last edit at Thursday, June 5, 2008 at 10:18PM by map1.
 
The answer is A!

Here's the logic:
The lower salvage values would further depress current earnings, but allow the company to recognize gains in the future whenever it wanted to sell assets, which would make earnings more manageable.

"This is actually a fairly common practice" - per Schweser
 
what the fu** ???????????????????????? ahhhhhhhhhhhhrrhrhr
 
It's stuff like that which makes me give the big ol' finger to schweser. That doesn't test the concepts at all.
 
I'm really pissed with schweser the practice test were nothing like the cfa mock test

If I have take this again in dec not sure where I wud practice from. Oh my I'm already talking dec :(
 
Wow!!
I could think it is A. Too much of schweser in my mind...may be but that may not good sometimes :-)
 
Honestly, with schweser pushing a question like that, they're only hurting their clients (hmm.. but wouldn't that help them.. interesting.... interesting...)
 
if we use the dupont breakout, increasing asset turnover rate (by decreasing salvage value) would increase the the ROE, wouldn't it?
 
not sure, coz salvage value affects NI through Depreciation. Lower salvage translates into higher depreciation which leads to lower NI, and lower net profit margin, that would decrease ROE.
 
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