【文章內(nèi)容簡(jiǎn)介】 inancial statement footnotes to see if any changes in these estimates have been made is important. b: Explain the role of depreciable lives and salvage values in the putation of depreciation expenses. Depreciation lives and salvage values: Depreciation is a significant expense that must be subject to critical (if not skeptical) analysis. Why? Because, while useful life, salvage value, and the depreciation method must be disclosed, management chooses them. This allows for the possibility of ine manipulation. Management could estimate a useful life longer than that warranted and then writedown the overstated assets in a restructuring process. Management might also writedown assets, taking an immediate charge against ine, and then record less future depreciation expense based upon the writtendown assets. This results in higher future ines in exchange for a onetime charge to current ine. Impact of depreciation methods on financial statements: Depreciation is an allocation of past investment cash flows and has no impact on the statement of cash flows. It is important for the analyst to consider the capital expenditures to better understand the impact of the choice of depreciation methods. In the early years of an asset’s life, accelerated methods tend to depress ine and retained earnings and result in lower return measures (ROE amp。 ROA). At the end of the asset’s life the effect reverses. c: Discuss how inflation affects the measurement of economic depreciation. Inflation has the effect of reducing the ability of depreciation expenses to reflect replacement costs. If the replacement cost of an asset is increasing, then depreciation based on historical cost will not be sufficient to replace the asset. In these cases of rising prices, reported ines and taxes are too high. This is a difficult but important consideration for analysis. The two key issues are the correct useful life of the asset and the correct rate of economic depreciation. Depreciation based on the current cost of the asset (as opposed to its historical cost) is superior in predicting future cash flow. Example: If an asset with a threeyear life is purchased for $3,000 and depreciated using straight line at $1,000 a year. After three years the asset is replaced at a cost of $5,000 (inflation). Total depreciation expense is an insufficient measure of replacement cash outflow. Depreciation based on current cost would measure the 3 year expense at $5,000 which is cash required for replacement. d: Compute the average age and average depreciable life of fixed assets. Several measures relating to plant age for firms using straight line are useful for interperiod and interfirm parisons are shown below. For illustrative purposes assume that current year depreciation expense is $10,000, gross plant and equipment is $200,000, and accumulated depreciation of $50,000. Average age % or relative age is: accumulated depreciation / ending gross investment = $50,000 / $200,000 = 25%. The average depreciable life is: gross plant and equipment / current year’s depreciation expense = $200,000 / $10,000 = 20 year average life of Pamp。E. The average age of plant and equipment is: accumulated depreciation / current year’s depreciation expense = $50,000 / $10,000 = 5 year average age of Pamp。E. If a firm’s relative age of plant and equipment is high, then the firm has not been adding to its capital stock and is probably a less efficient and petitive producer that will have to invest in PPamp。E in the future. However, the measure is sensitive to estimated life and salvage value used (the shorter estimated life, the greater depreciation and the higher average age percentage). e: Explain circumstances under which valuation impairment leads to a writedown. Assets carried at more than the recoverable amounts are considered impaired. For impaired assets retained by the firm, the issue is how to report the firm39。s inability to recover fully their carrying amount. Since management largely controls the timing and amount of impairment recognition, it is difficult to pare the impact of impairment and the resulting ratios over time and across panies. Impairments are reported pretax as a ponent of ine from continuing operations. Impairment losses are sometimes reported as a ponent of restructuring which also includes elements that affect cash flows (., severance pay). It is therefore important of separate writedowns of assets that do not affect cash flow from those ponents of restructuring which do affect cash flow. Loss from the impairment of assets must be recognized when there is evidence of a lack of recoverability of the carrying amount. Lack of recoverability may be signaled by a significant decrease in the market value or use of the asset, changes in the legal or business climate, significant cost overruns, or a forecast of a significant decline in the longterm profitability of the asset. The impairment of an asset cannot be restored. If an asset is held for disposition, it is carried on the balance sheet at the lower of cost and realizable value. f: Compute and describe the effects on financial statements and ratios of an impairment writedown. Financial statement impact of impairments: A writedown of assets affects the balance sheet categories of assets (PPamp。E), liabilities (deferred taxes) and stockholders’ equity (retained earnings). During the year of writedown, the loss from impairment decreases ine from continuing operations. This decreases retained earnings. The assets and its associated deferred taxes are reduced. Cash flow is not affected. Recognition of the impairment leads to a deferred tax asset not a current refund. In future years, less depreciation expense is recognized on the writtendown asset, resulting in higher ine. The following table relates the effects of impairments: Impairmen