The airline industry was hit particularly hard after the 9/11 attacks on the World Trade Center in 2001. In 2002, Southwest Airlines, one of the healthier airline companies, decided to lengthen the useful lives of its aircraft from 22 to 27 years. Shortly thereafter, following Southwest’s lead, other airlines made the same move. (a) What advantage, if any, did the airlines gain by making this change in estimate? (b) Would it have changed earnings or cash flows, and if it did, would the change have been favorable or negative? (c) Some people argue that the useful lives and depreciation of airplanes are irrelevant. They claim that because of the extensive maintenance and testing that airline companies are required by law to perform; the planes theoretically can be in service for an indefinite future period. What is wrong with this argument?
The airline industry was hit particularly hard after the 9/11 attacks on the World Trade Center in 2001. In 2002, Southwest Airlines, one of the healthier airline companies, decided to lengthen the useful lives of its aircraft from 22 to 27 years. Shortly thereafter, following Southwest’s lead, other airlines made the same move. (a) What advantage, if any, did the airlines gain by making this change in estimate? (b) Would it have changed earnings or cash flows, and if it did, would the change have been favorable or negative? (c) Some people argue that the useful lives and depreciation of airplanes are irrelevant. They claim that because of the extensive maintenance and testing that airline companies are required by law to perform; the planes theoretically can be in service for an indefinite future period. What is wrong with this argument?
Chapter3: Analysis Of Financial Statements
Section: Chapter Questions
Problem 1fM
Related questions
Question
The airline industry was hit particularly hard after the 9/11 attacks on the World Trade Center in 2001. In 2002, Southwest Airlines, one of the healthier airline companies, decided to lengthen the useful lives of its aircraft from 22 to 27 years. Shortly thereafter, following Southwest’s lead, other airlines made the same move.
(a) What advantage, if any, did the airlines gain by making this change in estimate?
(b) Would it have changed earnings or cash flows , and if it did, would the change have been favorable or negative?
(c) Some people argue that the useful lives and depreciation of airplanes are irrelevant.
They claim that because of the extensive maintenance and testing that airline companies are required by law to perform; the planes theoretically can be in service for an indefinite future period. What is wrong with this argument?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Cornerstones of Financial Accounting
Accounting
ISBN:
9781337690881
Author:
Jay Rich, Jeff Jones
Publisher:
Cengage Learning
Business Its Legal Ethical & Global Environment
Accounting
ISBN:
9781305224414
Author:
JENNINGS
Publisher:
Cengage
Cornerstones of Financial Accounting
Accounting
ISBN:
9781337690881
Author:
Jay Rich, Jeff Jones
Publisher:
Cengage Learning
Business Its Legal Ethical & Global Environment
Accounting
ISBN:
9781305224414
Author:
JENNINGS
Publisher:
Cengage
Auditing: A Risk Based-Approach (MindTap Course L…
Accounting
ISBN:
9781337619455
Author:
Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:
Cengage Learning