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L.8 · INTERMEDIATE · 2 MIN

PP&E Deep Dive: Four Depreciation Methods and Asset Disposal

GAAP permits four depreciation methods. The choice affects reported earnings significantly, even though the total depreciation over the asset's life is identical.

Quiz · 5 questions ↓

Compare

MethodPatternBest For
Straight-lineEqual amounts each yearMost common, simplest
Double-declining balanceAccelerated early, less laterAssets losing value quickly (tech equipment)
Sum-of-years digitsAccelerated but less extremeModerate front-loading
Units of productionBased on actual usageMining equipment, vehicles

Key point

Accelerated methods report lower earnings early and higher earnings later. This is purely a timing difference, not an economic one. But it affects quarter-to-quarter earnings comparisons.

Key insight

When comparing two companies, check their depreciation policies in the footnotes. Different methods on similar assets can make one company look more profitable than the other without any real operational difference.

Check-in

A company's PP&E shows $500M gross, $300M accumulated depreciation, $200M net. They use straight-line over 20 years. What does this tell you about fleet age and replacement risk?
Check your understanding

Sit with the ideas.

A machine was purchased for $120,000 and has accumulated depreciation of $45,000. It is sold for $70,000. What is the gain or loss on the sale?

Why:
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Other lessons in this course.

  1. 01Accrual vs Cash Accounting
  2. 02Depreciation: Spreading the Cost of Assets
  3. 03Stock-Based Compensation: The Hidden Cost
  4. 04Adjusting Entries: Why Period-End Matters
  5. 05Revenue Recognition: The ASC 606 Five-Step Model
  6. 06Bad Debts: When Customers Don't Pay
  7. 07Inventory: FIFO vs. LIFO and Why It Matters
  8. 08PP&E Deep Dive: Four Depreciation Methods and Asset Disposal— reading now
  9. 09The Cash Flow Statement: Follow the Actual Money
  10. 10DuPont Analysis: Decomposing Return on Equity
  11. 11EPS and Dilution: The Most Watched Number on Wall Street
  12. 12Deferred Taxes: Why Tax Expense Differs from Taxes Paid
  13. 13Lease Accounting: The Hidden Debt That Isn't So Hidden Anymore
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