Ok, I am getting confused. Is Accelerated Depr. more conservative than SL because NOA will be lower? Can you please help with the thinking here? THANKS!
NI will also be lower in short term b/c depreciation expense is higher. Long-term, NI is higher b/c there is less depreciation expense.
i would say faster depreciation & shorter life = more conservative because the faster you write it off the closer the measure is to expensing it
Here is where I start to go crazy. Dep. is a non-cash expense, so add it back to OCF. OCF is higher in the short term? Why not NI?
With OCF you are measuing actual cash flows so you are right that depr. gets added back. However, when calculating Net Income you are deducting numerous expenses from your revenues, including non-cash expenses (i.e., depreciation). There is probably a more eloquent way to explain it, but hopefully it helps.
cuz you deduct depreciation before you get to NI. So higher depreciation expense(due to accelerated schedule), equates to lower NI. This is more conservative.
BUT it is not necessarily indicative of earnings quality
CFO is higher because you save money on taxes. If it weren’t for the taxes, CFO would not be affected. NI is lower because it includes depreciation - and because what you save on taxes does not offset the depreciation. Does that help?
TheAliMan Wrote: ------------------------------------------------------- > BUT it is not necessarily indicative of earnings > quality due to the fact that it then increases NI in later years, right? So picking the deprec method may be a way for firm to manage earnings?
Got it. NI = Income statement CFO = Statement of cash flows Accel derp: Reduce IS number Increases CF number ?
DanLieb Wrote: ------------------------------------------------------- > Got it. > NI = Income statement > CFO = Statement of cash flows > > Accel derp: > Reduce IS number > Increases CF number > ? yes.
Thanks! L1 is coming back!
tvPM Wrote: ------------------------------------------------------- > TheAliMan Wrote: > -------------------------------------------------- > ----- > > BUT it is not necessarily indicative of > earnings > > quality > > > due to the fact that it then increases NI in later > years, right? So picking the deprec method may be > a way for firm to manage earnings? Correct. You might also be realizing gains because your asset carrying value might be low relative to the true economic value, so if you keep selling equipment, those ‘non-recurring’ gains might actually happen often, signifying poor earnings quality
it is conservative b/c it reduces reported net income (not cash flow), which obviously doesn’t look great. yes, it allows for higher net income later, but assuming the company keeps buying fixed assets, then higher depreciation could be permanent.
Also accelerated depreciation is considered more conservative is because you are not counting on your asset to be there for too long. If you are wrong you’ll gain, just like whenever you are conservtive. Another reason is that your asset in most cases derpreciates a lot more in the beginning of its life (just like a new car), so accelerated depreciation is also more in line with true economic depreciation.