What line item on income statement is most affected by their depreciation policy? Why? What “red...

What line item on income statement is most affected by their depreciation policy? Why? What “red flags” might one look for in order to assess whether a company is overly conservative or overly aggressive in taking depreciation expenses?

Expert Solution

The overall profitability of the company can be impacted the most by the depreciation policy which is adopted by the organisation because the depreciation policy is impacting the overall bottom-line of the income statement..

the profitability of the company is most impacted because the depreciation is reducing the overall revenues of the company to large extent but there is also a tax benefit advantage associated with depreciation it is known as depreciation tax shield.

if the company is trying to take lower depreciation than the actual then it will mean that the company is being over conservative and it is trying to inflate its profit in the short run.

if the company is trying to inflate its depreciation then it is trying to claim the present value of depreciation tax shield and it is trying to take the advantage by claiming depreciation quickly because depreciation is also reducing various kinds of taxation liability and it will also provide various kind of tax management solutions so one should be very sceptical about reading the depreciation policy of the organisation because it can lead to high impact over the overall operational performance of the company

jeff jeffy answered 2 years ago

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