3.16: Comparative Summary of Depreciation Methods
Given :
Straight Line :
Accelerated D epreciation Methods :
- Sum-of-the- Y ears ’ Digits :
- Double/Declining Balance :
Again, D/DB is the most accelerated of the various methods. The finance student needs to have some sense of the “ distortions” that accounting data present to him as a result of (management and the accountants’) “choice , ” and its impact on financial analysis . In addition to the alternate depreciation method s present ed in this example, we may also note that the salvage value is a n estimate. These arbitrary choices and estimates present alternative “ looks ” f or the financial statements – and interpretative difficulties for the analyst .
Final Note : The thre e m e thods covered in the last pages are NOT acceptable fo r Tax A ccounting. There, a wholly different system must be implemented by dint of a 1986 law. The tax system is called “Modified Accelerated Cost Recovery System,” or simply “MACRS.” This method will not be covered here.