Flag Financial uses straight-line depreciation for its equipment with an estimated useful life of 10 years and zero residual value. The CEO points out that the equipment will last much shorter than 10 years, perhaps 5 years. What is the impact on earnings per share and net income of depreciating equipment over 5 years rather than 10 years?

Question

Quizplus · Accepted Answer

If Flag Financial depreciates the equipment over 5 years instead of 10 years, the depreciation expense will be higher, resulting in lower net income and earnings per share. This is because depreciation is a non-cash expense that is subtracted from revenues to arrive at net income. By increasing the depreciation expense, the company lowers its net income and earnings per share.

Flag Financial Uses Straight-Line Depreciation for Its Equipment with an Estimated