When a company’s growth stops for a long period of time, which of the following is most likely to occur?

CFA Level I
#1

When a company’s growth stops for a long period of time, which of the following is most likely to occur? a. Deferred taxes will decline. b. Inventories will decline. c. Off-balance sheet assets will increase. d. Debt will increase.

#2

A?

#3

sorry I misread the question… asnwer should be B. as A just talks about Deferred taxes and not DTA or DTL specifically… - Dinesh S

#4

Agree with A

#5

B. option a did not mention DTL/DTA. DTL would decline. DTA might remain same/increase if company goes on incurring losses

#6

A. Which is “most likely to occur”. During periods of growth, new fixed assets are generally purchased. Taxes payable are generally less than income tax expense due to accelerated depreciation of fixed assets for tax purposes. Thus, DTL’s are formed. Once this period of growth stops, taxable income will start to drop relative to pretax income. Thus, DTL’s will begin to reverse.

#7

Agree with A

#8

if a companies growth stops, then inventory levels should stabilize (not decrease). also inventory managment is a science unto itself and doesn’t necessarily depend on a companies growth rate have to go with A

#9

A

#10

A. agree with with apcarlso.

#11

Agreed, I go with A also.

#12

DTL would surely go down, but what about DTA’s? If the company has stopped being profitable, they don’t have sufficient income to claim their DTA’s on, so DTA accounts stay the way they were, right? siambank, what’s the correct answer? - Dinesh S

#13

definitely A

#14

I think B for the reason that when company’s are preparing for growht don’t they build up their inventories? So this would be the opposite…is my logic flawed?

#15

Amtrak - I don’t think a company in the growth phase would want to increase their inventory. It makes sense it will produce/purchase more inventory, but they are also selling more due to growth. Why would any company want more inventory sitting on their shelves? Make sense?

#16

dinesh.sundrani Wrote: ------------------------------------------------------- > DTL would surely go down, but what about DTA’s? If > the company has stopped being profitable, they > don’t have sufficient income to claim their DTA’s > on, so DTA accounts stay the way they were, > right? > > siambank, what’s the correct answer? > > - Dinesh S I think they key is, they don’t say the company has stopped being profitable. They say the company’s growth has slowed, or stopped.

#17

does no growth mean that earnings stopped growing or that revenues stopped growing?

#18

bchadwick Wrote: ------------------------------------------------------- > does no growth mean that earnings stopped growing > or that revenues stopped growing? Revenue stopped growing.

#19

Surely A. I gree with explanation of apcarlso

#20

siambank , what is the answer and explanation given here. There are different views and I hope CFA exam questions would restrain our assumptions.