Schweser, Book 3: FSA, Page 330 - Self Test - FSA 15) If a firm takes an impairment charge due to decrease in the value of a long-lived depreciable asset, which of the following is least likely a result for the period in which the charge is take? A. The debt to equity ratio is increased. B. Net Income is reduced. C. Operating income is reduced. D. Taxes are reduced. So, I looked at this question for about 5 minutes going through all the choices. When I initially looked at it, A through C are affected by impairment charge. I was not sure about what they meant by Taxes, Income Tax expense would be affected due to lower EBT, however not Income Tax Payable. After looking at it for a few more minutes, I finally relented and looked at the answer sheet. I was not satisfied by the explanation Schweser provided. Aren’t the answer choices mis-leading? Shouldn’t choice D be more clearly explained as ‘Income Tax Payable is reduced’? Or am I reading too much into. If anyone hasn’t figured out, the answer is D. To the folks who have passed L1; are questions like these, which are not 100% clearly explained, expected to be on the test or is this one of Schwesers’ mess ups?
These questions are exactly how a majority of FSA questions are asked, as far as purely conceptual…they are more clear than this though.
to review this for myself - “income taxes payable are reduced” would be least likely because we do not know what our deferred tax assets/liabilities are? I guess I would like some clarity as to why exactly that the taxes payable would not also be reduced. I have read through all this, but still have some questions. Thanks
You can expect the language on the CFA test to be more precise than Schweser. Take Schweser for what it’s worth… it’s there to help you review, but it’s not sacred. As for the question, if I’m remembering it correctly, the most likely reason the answer is D is because for tax purposes an impairment charge isn’t recognized until the impaired asset is sold, whereas on the financial statements, it is recognized in the period when it is discovered.