Question

Companies often are under pressure to meet or beat Wall Street earnings projection in order to increase stock prices and also to increase the value of stock options. Such pressure may cause some managers to alter their estimates for depreciation to artificially create desired results.

REQUIREMENT 1: From your understanding of the chapter, how can managements estimates affect the amount of depreciation expense on the company's financial statements?

REQUIREMENT 2: Are the decisions of investors and creditors affected by these accounting estimates?

REQUIREMENT 3: Should a company alter depreciation estimates for the sole purpose of meeting expectations of Wall Street analysts?

ADAPTED FROM AP 7-5 - Financial Accounting 5th Edition Spiceland

Please answer the requirements above using your knowledge of Long-Term assets from Chapter 7.

Answer 1

1. Yes.

Discount is influenced by management’s decision of discount method and the Administration or Head of the Company will decide on the asset’s beneficial service life and continuing value. The reduction value is advised as an amount in the revenue statement. Collection Reduction is listed as a contra asset in the balance sheet.

2. Yes.

Many amounts announced in economic declarations depend on estimations by the administration, and these estimations are a critical part of the data set used by investors and creditors to make choices. To the extent that these estimations are substantially deceived by the administration, economic reporting produces misleading data.

3. No.

Although Wall Street analysts place huge pressure on firms or corporations to meet profits expectations, administration and the company’s accountants have a legal and ethical duty to fairly publish all estimations, along those for discount. A successful defense for falsifying financial show cannot involve stress from outside decision-makers.

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