Reading 37: Analysis of Long-Lived Assets: Part II - Analys method, about, impact, following, statements

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6.When the depreciation method is changed from an accelerated method to the straight-line method, which of the following statements about the impact on financial statements is least accurate?

A)   ROE and ROA will increase due to the increase in net income.

B)   ROE and ROA will decrease due to the increase in equity and assets.

C)   No cumulative effect exists if the change is applied only to newly acquired assets.

D)   Depreciation expense will decrease and net income will increase.

7.All of the following can be a motivation to change the depreciation method for financial reporting purposes EXCEPT:

A)   debt covenants attached with accounting results.

B)   an increase in cash flows.

C)   management compensation contracts which are based on reported net earnings.

D)   to report improved earnings or lower losses.

8.Which of the following statements regarding depreciation methods is TRUE?

A)   Straight-line depreciation results in an increasing rate of return over the life of an asset.

B)   Straight-line depreciation causes an increase in reported income over time.

C)   Sinking fund depreciation is based on the theory that an asset generates an increasing rate of return over time.

D)   The two accelerated depreciation methods, sum-of-year's digits and double-declining balance, recognize greater depreciation expense in the latter portion of an asset's life and less expense in the early portion of its life.

9.When a company changes from an accelerated depreciation method to the straight-line method, which of the following is least likely to occur on its financial statements?

A)   No cumulative effect exists if the change is applied to all assets.

B)   Net income from continuing operations increases.

C)   Periodic depreciation expense decreases.

D)   Return on assets and return on equity increase.

10.ABC Investments has purchased a new computer system for $1.4 million and decided to depreciate it over a 4-year period on a sum-of-years’ digits (SYD) method. ABC estimates that the salvage value will be $200,000 at the end of the four years. What will be the depreciation expense for the third year?

A)   $300,000.

B)   $275,000.

C)   $186,000.

D)   $240,000.

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答案和详解如下：

6.When the depreciation method is changed from an accelerated method to the straight-line method, which of the following statements about the impact on financial statements is least accurate?

A)   ROE and ROA will increase due to the increase in net income.

B)   ROE and ROA will decrease due to the increase in equity and assets.

C)   No cumulative effect exists if the change is applied only to newly acquired assets.

D)   Depreciation expense will decrease and net income will increase.

The correct answer was B)    

Although assets and equity will increase, the larger increase in net income will cause an overall increase in ROA and ROE.

7.All of the following can be a motivation to change the depreciation method for financial reporting purposes EXCEPT:

A)   debt covenants attached with accounting results.

B)   an increase in cash flows.

C)   management compensation contracts which are based on reported net earnings.

D)   to report improved earnings or lower losses.

The correct answer was B)

The change in depreciation method for financial reporting is a pure accounting change without any direct cash flow consequences, since firms can use different depreciation methods for tax and reporting purposes.

8.Which of the following statements regarding depreciation methods is TRUE?

A)   Straight-line depreciation results in an increasing rate of return over the life of an asset.

B)   Straight-line depreciation causes an increase in reported income over time.

C)   Sinking fund depreciation is based on the theory that an asset generates an increasing rate of return over time.

D)   The two accelerated depreciation methods, sum-of-year's digits and double-declining balance, recognize greater depreciation expense in the latter portion of an asset's life and less expense in the early portion of its life.

The correct answer was A)

Straight-line depreciation applies a constant amount of depreciation to each period over the life of the asset; this method yields an increasing rate of return over the life of this asset.

Year	Beginning carrying value	Straight-line depreciation	Net income	Rate of return on assets
1	$1,000	$200	$300	30.0%
2	$800	$200	$300	37.5%
3	$600	$200	$300	50.0%
4	$400	$200	$300	75.0%

9.When a company changes from an accelerated depreciation method to the straight-line method, which of the following is least likely to occur on its financial statements?

A)   No cumulative effect exists if the change is applied to all assets.

B)   Net income from continuing operations increases.

C)   Periodic depreciation expense decreases.

D)   Return on assets and return on equity increase.

The correct answer was A)

No cumulative effect exists if the change is applied only to newly acquired assets. If the change is applied to all assets, the cumulative effect is an increase in net income.

10.ABC Investments has purchased a new computer system for $1.4 million and decided to depreciate it over a 4-year period on a sum-of-years’ digits (SYD) method. ABC estimates that the salvage value will be $200,000 at the end of the four years. What will be the depreciation expense for the third year?

A)   $300,000.

B)   $275,000.

C)   $186,000.

D)   $240,000.

The correct answer was D)

The SYD method depreciation = ($1,400,000 – $200,000) × (number of years remaining / sum of years). For third year, = $1,200,000 × (2 / 10) = $240,000.