Financial Reporting Mechanics

CFA Level I FRA
#1

Its confusing me

Q4. Concept checkers (Kaplan-Schweser) Page 28

A decrease in assets would _ least likely _ be consistent with a(n):

A. increase in expenses

B. decrease in revenues

C. increase in contributed capital

The solution says the decrease in asset would least likely be consistent with a increase in capital contributed.

As we all know, The decrease will most likely be consistent with decrease in revenue.

Q.1 How does that decrease lead to an increase in expense?

Anyone with a simple and clear explanation?

Thanks in anticipation

Olayeancah

#2

Cash payment for any utility could be an example.

#3

Think about depreciation or a write-down, e.g. of inventory or receivables.

In both cases, the asset value goes down. At the same time, the company recognises an expense which has a downward impact on earnings as reported in the Income Statement. At the end of the reporting period, earnings are transferred to Equity, so the the two sides of the balance sheet balance (the fall in assets is matched by a fall in equity).

#4

Hey @wotjet

Brilliant analysis! Now am clear

Many Thanks…

Regards,

Olayeancah

#5

Great! You’re welcome.