business and finance question

Anonymous
timer Asked: Jul 13th, 2014
account_balance_wallet $5

Question Description

companies can also use various methods of depreciation for financial purposes.  Why would a company choose to do this?  Do you think it makes sense to use more than one method?  Why or why not?

Tutor Answer

Alex Z
School: Carnegie Mellon University

A company might choose to do this for a variety of reasons, but the predominant reason relates to taxes and net income.  Specifically, the more rapidly a company depreciates capitalized assets, the more rapidly it can recognize the expenses on the income statement.  This, of course leads to lower taxable income which, in turn, results in a lower tax burden.

Conversely, a company might desire to inflate its net income (ex., a publicly traded company who is trying to hit a certain number to please Wall St and maintain a certain stock price).  This could be done by deprecating its capital assets more slowly, thereby delaying the recognition of the related expanses, thus increasing net income.

Companies commonly use two different sets of financials (one for GAAP, one for taxes).  More often than not, each set will use a different depreciation methodology.

Fundamentally, I don't think this is a practice that should be employed...ultimately, this entire scheme is just delaying (or accelerating) the inevitable recognition of the expenses and, in the interim, is just causing additional work and injecting unnecessary complexity.  Besides, no sophisticated investor or stock analyst is fooled by these "games" and will adjust the financial figures accordingly.

Please feel free to contact me directly for assistance with questions like these.  Also please select my answer as "best".  Thanks.

flag Report DMCA
Review

Anonymous
Tutor went the extra mile to help me with this essay. Citations were a bit shaky but I appreciated how well he handled APA styles and how ok he was to change them even though I didnt specify. Got a B+ which is believable and acceptable.

Similar Questions
Hot Questions
Related Tags
Study Guides

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors