Question

Which limitation of an income statement occurs when one company uses an accelerated depreciation method while another company uses straight-line depreciation?

Answer 1

Answer:

The options for answering this question are the following:

A. Companies omit from the income statement items they cannot measure reliably.

B. Income measurement involves judgment.

C. Income numbers are affected by the accounting methods employed.

D. All of these answer choices are correct.

The correct answer is C. Income numbers are affected by the accounting methods employed.

Explanation:

Accelerated depreciation is a method of calculating the attrition of the asset, where through the use of indices greater wear is assigned to the first years of use, which gradually decreases over the years as the middle age This method assumes that during the first years the asset is in better physical and technical conditions so it can be subjected to more intense use, generating more units produced or services provided, where maintenance costs will be lower. This method represents an incentive for the company that applies it, since by reflecting a higher depreciation expense in the first years its usefulness in this period will be lower, which will result in a lower tax burden. This will allow you, among other things, to pay less to the treasury and have cash to recover from the large disbursement represented by the acquisition of a fixed asset, since these assets generally have a high cost, last several financial years and gradually lose their value.

Linear depreciation is that which, through a previously established depreciation rate, is applied in a linear manner throughout the entire useful life of the medium. With this it is achieved that the depreciation expense remains the same during all the years that the medium lasts. This method does not offer tax incentives to its holders, who are forced to record the same expense in the first year when the medium is in optimal physical and technological conditions than during the last year of useful life when the productivity of the asset is inexorably lower due to its high technological wear and tear due to its moral aging in relation to the new technologies existing in the market.