Chartered Financial Analyst (CFA) Practice Exam Level 2

What is the formula for calculating Carrying Value?

1. Initial Cost + Accumulated Depreciation

2. Initial Cost - Current Market Value

3. Initial Cost - Accumulated Depreciation

4. Current Market Value + Accumulated Depreciation

The correct answer is: Initial Cost - Accumulated Depreciation

The formula for calculating Carrying Value is derived from the basic accounting principle that reflects the value of an asset on the balance sheet after accounting for depreciation. Carrying Value, also known as Book Value, represents the original cost of an asset adjusted for any depreciation that has been recognized over time. In the correct formula, the Initial Cost of the asset is reduced by the Accumulated Depreciation, which captures the total amount of depreciation expense allocated to the asset since it was acquired. This method accurately reflects the asset's remaining value that can be utilized by the business or can be realized upon disposal. The other choices provided do not align with the correct calculation. For instance, adding accumulated depreciation to the initial cost inaccurately suggests an increase in value rather than demonstrating the wear and tear an asset experiences over its useful life. Furthermore, subtracting the current market value from the initial cost does not provide a recognized accounting figure for the asset, as market value can fluctuate independently of the book value. Adding current market value and accumulated depreciation also misrepresents how assets are valued in financial records, as carrying value is not meant to reflect current market fluctuations.