Reading 22: Long-lived Assets: Implications for Financial Sta assets, regarding, interpret, following, 2011

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Session 5: Financial Reporting and Analysis: Inventories and Long-lived Assets
Reading 22: Long-lived Assets: Implications for Financial Statements and Ratios

LOS d: Analyze and interpret the financial statement disclosures regarding long-lived assets.

 

 

The following information has been gathered regarding a firm that uses straight line depreciation.

• Gross plant and equipment $1,250,000
• Depreciation expense $235,000
• Accumulated depreciation $725,000

 

The average depreciable life of plant and equipment is:

A) 3.09 years.

B) 8.40 years.

C) 5.32 years.

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The average depreciable life = Gross PPE / Depreciation expense

5.32 = $1,250,000 / $235,000

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Average remaining useful life of the plant and equipment is:

A) 3.09 years.

B) 2.23 years.

C) 5.32 years.

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Remaining useful life = (gross investment – accumulated depreciation) / depreciation expense

2.23 = ($1,250,000 – $725,000) / $235,000

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The average age of plant and equipment is:

A) 1.40 years.

B) 5.32 years.

C) 3.09 years.

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The average age = accumulated depreciation / depreciation expense

3.09 = $725,000 / $235,000

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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.

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

A) depreciable life.

B) age as a percent of depreciable life.

C) age.

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

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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.

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

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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.

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The average useful life = gross investment / depreciation expense

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

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The average age of plant and equipment is:

A) 1.33 years.

B) 7.87 years.

C) 11.49 years.

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The average age = accumulated depreciation / depreciation expense

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

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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.

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Average age of depreciable assets is useful for two reasons:

1. To assess how competitive the corporation will be going forward (older assets are less efficient).

2. 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.