CFA Level I · CFA Level I Exam · Analysis of Long-Term Assets
An analyst notes that a company reported a large gain on the sale of equipment in operating profit, and the company is not in the business of selling equipment. When assessing sustainable earnings, the analyst should most appropriately:
The analyst should exclude the gain from forecast operating earnings because it is non-recurring. A gain on selling equipment by a company that does not trade equipment is unlikely to repeat, so including it would overstate sustainable earnings.
- Ainclude the gain fully in forecast operating earnings
- Bexclude the gain as non-recurring from forecast operating earningsCorrect
- Creclassify the gain to cost of goods sold
Explanation
Gains on asset disposals outside ordinary business are generally non-recurring, so analysts remove them when estimating sustainable earnings. Including them overstates future earnings; moving them to cost of goods sold distorts margins.
Did you get it right without looking?
One question tells you little. A timed set on Analysis of Long-Term Assets shows your real accuracy, how long you take and where you lose marks.
More Analysis of Long-Term Assets questions
- An IFRS reporter carries a cash-generating unit with goodwill of 40, other net assets of 160, giving a carrying amount of 200. The recoverab…
- Under IFRS, goodwill arising in a business combination is most likely:
- Which of the following costs related to an existing item of property, plant and equipment would most likely be capitalized under IFRS?
- Under IFRS, an entity previously recognized an impairment loss on an asset carried under the cost model. If the recoverable amount later ris…
- Under IFRS, an entity sells an item of property, plant and equipment for more than its carrying amount. The difference between the net dispo…
- Compared with the cost model, an entity that applies the revaluation model to its depreciable property after an upward revaluation will most…