understate - overstate (am I totally dumb???) please look at this question


The question:

[question removed by moderator]

The story behind:

broadcast licences were written down in 2014, and the analyst (Treadway) beleives this was a way of management to manipulate earnings.

What I don’t understand:

Licences were written down in 2014 ==> amortization cost was lower in 2015 ==> net profit margin was higher in 2015 based on actual economic results.

But if the analyst reverses this ==> net profit in 2015 would have been lower (based on his calculations).

So the analyst would understate and not overstate profit margin.

I believe the question is asking had the analyst not reversed the write-down, during 2015 the intangible assets were understated, which would have understated amortization expense for the year and increased profit resulting in overstated 2015 net profit margin.

I agree with above, since it says her ORIGINAL 2015 analysis.

I don’t know. We are comparing 2 cenarios:

  1. “actual economic results in 2015” - I assumed this was the company’s official fin. statements, i.e. where the impairment was written down hence the depreciation is lower the NI is higher in 2015

  2. “her original 2015 analysis” - should be the other scenario,where the impairment should have not happened (based on the analyst’s view) so here the NI should be lower in 2015

2nd scenario is compared to the first (her analysis compared to actual results) and her analysis results in lower NI.

_ I agree the word ‘original’ might be the clue here but for me this is such a complicated way of expressing something… _