For question #2 and #3, can someone please explain why the annual depreciation (50K and 100K) is not considered a cost? Accounting profit questions confuse me sometimes, for instance in the Elan problems for reading 16, question #15 (2010). Magma corporation’s accounting profit is calculated by subtracting the straight line depreciation of $100K from the total revenue. To me, it seems inconsistent with the answers to question #2 and #3 from the EOC reading. Any direction and/or advice is much appreciated. Thank you!
Hey that question tripped me up too but I realized that the key word in the sentence is ‘accounting reporting’. My rationale was that the depreciation is thus made for tax purposes and it’s not the opportunity cost of using the machine. Hence, it’s not calculated - had it been the economic depreciation it would be taken into account. Note that in question 4 of the Reading 16 the accounting depreciation is not used in calculating the economic profit. Hope that helps. I haven’t yet used Elan though so I don’t know what the questions are and how they compared to the CFA readings.