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 fewer than 10 years,perhaps only 5 years.If equipment is depreciated over 5 years rather than 10 years,what is the impact on earnings per share and net income of depreciating equipment?

Question

Quizplus · Accepted Answer

Depreciating equipment over a shorter period (5 years instead of 10) will increase the annual depreciation expense, thereby reducing net income. Since earnings per share (EPS) is calculated based on net income, a decrease in net income will also decrease EPS.

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