Reading 37 p. 416 #5 In March 2000, PBG extended the estimated useful life of its certain assets and thus lowered total depreciation cost by $14 million. Based on the given info., this accounting change would improve the company’s reported earnings in year 2000 and beyond due to the reduced depreciation expense. Will this change also increase both its gross profit and operating income and subsequently gross profit margin and operating margin???
Depr expense is not included in calculating gross profit. so no effect on gross profit and gross profit margin. Operating income will be higher as depr is operating expense. So operating profit margin will also be higher…
Sumit is absolutely right… Get this point INGRAINED in your mind…depreciation is NEVER included in gross profit.
sumit_kansal Wrote: ------------------------------------------------------- > Depr expense is not included in calculating gross > profit. so no effect on gross profit and gross > profit margin. > > Operating income will be higher as depr is > operating expense. So operating profit margin will > also be higher… The answer at Vol. 3 A-28 table actually showed the adjusted 2000 gross profit & operating income; gross profit margin & operating margin are all DECREASED compared to the 2000 data prior to the accounting change. Wondering why adding the reduced dep. exp. to COGS and S,D,&A exp.?
Can anyone explain me why depreciation expense is not included in gross profit? I think it is included in COGS.
According to the given info., the total depre. cost was reduced $14M due to the accounting change (by extending the economic life of certain assets). Thus, I think the COGS and S,D,&A exp. should be reduced too - resulting in INCREASE of gross profit & operating income; gross profit margin & operating margin. Can someone tell why if my thinking is wrong? Thx.