Accelerated depreciation allows firms to depreciate less and receive less of the
ID: 2761295 • Letter: A
Question
Accelerated depreciation allows firms to
depreciate less and receive less of the dollars of cash flows earlier in the asset's life.
depreciate more and receive more of the dollars of cash flows earlier in the asset's life.
not pay any taxes during an asset's life.
depreciate more and receive more of the dollars of cash flows later in the asset's life
depreciate less and receive less of the dollars of cash flows earlier in the asset's life.
depreciate more and receive more of the dollars of cash flows earlier in the asset's life.
not pay any taxes during an asset's life.
depreciate more and receive more of the dollars of cash flows later in the asset's life
Explanation / Answer
Accelerated depreciation allows companies to write off their assets faster in earlier years than the straight-line depreciation method and to write off a smaller amount in the later years. The major benefit of using this method is the tax shield it provides. Companies with a large tax burden might like to use the accelerated-depreciation method, even if it reduces the income shown on the financial statement.
This depreciation method is popular for writing off equipment that might be replaced before the end of its useful life since the equipment might be obsolete (e.g. computers).
Companies that have used accelerated depreciation will declare fewer earnings in the beginning years and will seem more profitable in the later years. Companies that will be raising financing (via an IPO or venture capital) are more likely to use accelerated depreciation in the first years of operation and raise financing in the later years to create the illusion of increased profitability (higher valuation).