i will repeat my question. why is equity reduced by 5 mil?
mwvt9 Wrote: ------------------------------------------------------- > Can you show the explanation for ROE? I will copy-paste the explaination from QBank once I get home. I dont have access to it now
Do you know the number of the question? I will post the answer for you if you like.
It’s the LOS quiz from the SS7 Synthesis LOS. Sorry don’t have the exact ques number.
here’s what I think it is… 1. Since NI is reduced by 3.25, eventually this will reduce your equity by 3.25 as well. 2. In addition, since there is a change in your NI and taxes, you’d book new DTL of 1.75 (5*.35 of lower taxes due to Accel Dep and Lower Income) - The offsetting entry for this should be to equity - a reduction (since they are on the same side and we need to balance the equation A = L+E). Hence you reduce equity by 1.75. Total reduction in Equity = 3.25 + 1.75 = 5
Ok. Guess we’ll have to wait. I don’t have time to browse through each LOS…and by the way, that is an LOS question? They are supposed to be the easiest!
mumukada Wrote: ------------------------------------------------------- > here’s what I think it is… > > 1. Since NI is reduced by 3.25, eventually this > will reduce your equity by 3.25 as well. > > 2. In addition, since there is a change in your NI > and taxes, you’d book new DTL of 1.75 (5*.35 of > lower taxes due to Accel Dep and Lower Income) - > The offsetting entry for this should be to equity > - a reduction (since they are on the same side and > we need to balance the equation A = L+E). Hence > you reduce equity by 1.75. > > Total reduction in Equity = 3.25 + 1.75 = 5 That makes sense.
If my rule was in place…we would know for sure. 
hahah… I thought about you lxada269 when I posted this question at 04:10AM and it took 25 mins for the 1st reply from Kabhii to come in. It’s all because of the time difference you see!
Or dinesh would have revolted and never posted the question in the first place! EDIT: Didn’t see dinesh’s post above.
thanks, mumukada!
dinesh.sundrani Wrote: ------------------------------------------------------- > hahah… I thought about you lxada269 when I posted > this question at 04:10AM and it took 25 mins for > the 1st reply from Kabhii to come in. It’s all > because of the time difference you see! Dinesh…what in the hell are you doing up at 4AM?
seriously dinesh…that was going to be my next question too…!
People I am seriously out of shape with my studying. I don’t remember much of what I read in FSA, CorfFin, Equities, FI, Der, PM since I have just done Quant and Econ revision. With just 1 month at hand, I feel I might not be able to make it on the 7th. But it’s my mistake, I started late for the exam (1st Mar), will try to cover-up for the one month lost due to unavoidable circumstances. … and ofcouse will try going to bed early!
dinesh.sundrani Wrote: ------------------------------------------------------- > > … and ofcouse will try going to bed early! early…like in the night?? or in the morning!!!
***************** Answer from QBank = D ***************** The change in depreciation methods results in net income increasing by $3.25 million ($5 million × (1-0.35)) and total assets increasing by $5 million. Without the change in depreciation methods SCI would have reported: Depreciation expense $30 million Net income $31.75 million Total assets $245 million Shareholders equity $190 million Note that assets would have been lower by $5 million due to the accelerated depreciation and equity would be lower by $3.25 million (5 × (1-0.35)) due to lower retained earnings (you might think of this as SCI having less cash). In order to balance the $5 million reduction in assets, equity will reduce by an additional $1.75 million. Therefore, ROA would have been 12.96 percent (31.75/245) and ROE would have been 16.71 percent (31.75/190).
dinesh.sundrani Wrote: ------------------------------------------------------- > People I am seriously out of shape with my > studying. I don’t remember much of what I read in > FSA, CorfFin, Equities, FI, Der, PM since I have > just done Quant and Econ revision. With just 1 > month at hand, I feel I might not be able to make > it on the 7th. > > But it’s my mistake, I started late for the exam > (1st Mar), will try to cover-up for the one month > lost due to unavoidable circumstances. > > … and ofcouse will try going to bed early! i’m finding this too - i’ve just finished reading new material and am going through FSA in a significant way, and then equities, ethics… i started llooking at quant but given the weighting on the test i didn’t want to get bogged down
dinesh.sundrani Wrote: ------------------------------------------------------- > ***************** > Answer from QBank = D > ***************** > > The change in depreciation methods results in net > income increasing by $3.25 million ($5 million × > (1-0.35)) and total assets increasing by $5 > million. Without the change in depreciation > methods SCI would have reported: > > Depreciation expense > $30 million > > Net income > $31.75 million > > Total assets > $245 million > > Shareholders equity > $190 million > > Note that assets would have been lower by $5 > million due to the accelerated depreciation and > equity would be lower by $3.25 million (5 × > (1-0.35)) due to lower retained earnings (you > might think of this as SCI having less cash). In > order to balance the $5 million reduction in > assets, equity will reduce by an additional $1.75 > million. Therefore, ROA would have been 12.96 > percent (31.75/245) and ROE would have been 16.71 > percent (31.75/190). Shouldn’t reduction in asset of $5 million lead to a reduction in RE of 3.25 million and reduction in DTL of 1.75 million?
kabhii A DOWN by 5 L = NO change E DOWN by 5*(1 - 0.35) = 3.25 E again DOWN by 1.75 [to maintain the integrity of the BS] I had the same sense as you, of lowering the DTL by 1.75, where have we gone wrong? or is it Schweser?
i think DTL goes up, which is why equity goes down by 1.25.