Companies often are under pressure to meet or beat Wall Street earnings projections 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.Required: 1. Understand the reporting effect: Do estimates by management affect the amount of depreciation in its company’s financial statements? 2. Specify the options: To increase earnings in the initial years following the purchase of a depreciable asset, would management (a) choose straight-line or double-declining balance, (b) estimate a longer or shorter service life, and (c) estimate a higher or lower residual value? 3. Identify the impact: Are decisions of investors and creditors affected by accounting estimates? 4. Make a decision: Should a company alter depreciation estimates for the sole purpose of meeting expectations of Wall Street analysts?

Question

Companies often are under pressure to meet or beat Wall Street earnings projections 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.

Required:
1. Understand the reporting effect: Do estimates by management affect the amount of depreciation in its company’s financial statements?
2. Specify the options: To increase earnings in the initial years following the purchase of a depreciable asset, would management (a) choose straight-line or double-declining balance,
(b) estimate a longer or shorter service life, and (c) estimate a higher or lower residual value?
3. Identify the impact: Are decisions of investors and creditors affected by accounting estimates?
4. Make a decision: Should a company alter depreciation estimates for the sole purpose of meeting expectations of Wall Street analysts?

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