CFA Level I · CFA Level I Exam · Financial Reporting Quality
A manufacturer lengthens the estimated useful life of its equipment from 8 years to 12 years in a year when earnings are below analyst targets. The change is not supported by any change in how the equipment is used. This action is most likely:
The action is aggressive accounting that increases current earnings. Extending useful life without any change in asset usage reduces annual depreciation expense, which raises reported income and asset carrying value, and the timing around missed analyst targets suggests the motive is to inflate results.
- Aconservative accounting that lowers current earnings
- Baggressive accounting that increases current earningsCorrect
- Cneutral accounting with no effect on reported earnings
Explanation
A longer useful life lowers annual depreciation, which raises current operating income and assets. With no economic justification and a motive to meet targets, this is aggressive earnings management. It is not conservative, and it clearly affects earnings.
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