Reading 22: Long-lived Assets: Implications for Financial Sta

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发表于 2011-3-7 15:49 | 只看该作者

A manufacturing firm reports the following in its financial statements:

Gross plant and equipment: $2,700,000.
Depreciation expense: $235,000.
Accumulated depreciation: $1,850,000.

The average useful life of plant and equipment is:

A)	19.36 years.

B)	11.49 years.

C)	7.87 years.

The average useful life = gross investment / depreciation expense

11.49 = $2,700,000 / $235,000

The average age of plant and equipment is:

A)	1.33 years.

B)	7.87 years.

C)	11.49 years.

The average age = accumulated depreciation / depreciation expense

7.87 = $1,850,000 / $235,000

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发表于 2011-3-7 15:49 | 只看该作者

In industries where there are rapid changes in technology related to production processes, which of the following characteristics will most likely indicate that a firm has a competitive advantage?

A)	Low average age of equipment.

B)	Low capital expenditures.

C)	High earnings per share.

Average age of depreciable assets is useful for two reasons:

To assess how competitive the corporation will be going forward (older assets are less efficient).
Estimate financing required for major capital expenditures to replace depreciated assets.

While low capital expenditures may result in higher earnings in the short run, in the long run, the company may find itself at a comparative disadvantage if technological changes are rapidly increasing. EPS is not comparable between companies.

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发表于 2011-3-7 15:50 | 只看该作者

Two companies in the same industry are similar in all aspects except that the average age of the depreciable assets for Company B is 10 times greater than the average age of the depreciable assets for Company A. Which of the following statements is least likely accurate? Company B will have:

A)	higher taxes.

B)	lower depreciation expense.

C)	a competitive advantage in the future.

Company A will most likely have a competitive advantage from using newer equipment on average. Company B’s assets are mostly depreciated. Therefore, depreciation expense will be lower and if all other aspects are similar, the earnings and taxes for Company B will be higher.

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发表于 2011-3-7 15:50 | 只看该作者

Ending gross investment/depreciation expense is used to estimate the average:

A)	depreciable life.

B)	age as a percent of depreciable life.

age.

Average depreciable life is approximated by: ending gross investment / depreciation expense

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发表于 2011-3-7 15:50 | 只看该作者

A firm using straight-line depreciation reports the following financial information:

Gross investment in fixed assets of $89,167,205.
Accumulated depreciation of $35,341,773.
Annual depreciation expense of $3,885,398.

The approximate age of the fixed assets is:

A)	2.52 years.

B)	9.10 years.

C)	22.95 years.

Average age of fixed assets = accumulated depreciation / annual depreciation = $35,341,773 / $3,885,398 = 9.10.