Sabanes Oxley Act of 2002

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Depreciation and depletion are two models of computing financial reports. These techniques are used as adjustments when preparing statements of cash flow within the direct or indirect method. This paper will identify and examine the methods of depreciation and depletion, describe the difference between the methods, and compare and contrast depreciation and depletion as well using scholarly references to support the points. Net income is reduced through depreciation and is an expense of the company. It does not reduce cash of the company. This adjustment does not involve the calculations of current cash flow. Calculations should be put back on net income in order to produce the outcomes of cash that has been provided by the operations of the company. Depreciation occurs when economic and physical factors cause a decline with potential services. It provides replacement funds but does not provide funds. Depreciation is a non-cash expense given by the IRS that is very important to a company’s cash flow. Book depreciation is based upon the usage of assets. Tax depreciation is subtracted from the company's income when completing yearly taxes using MACRS. Kieso, Kimmel, and Weygandt (2011) explain that depreciation as “the process of allocating the cost of an asset to expense over its useful life” (p. 197). It is a way to basically created funding for the company and also means the value of an asset has been deducted. It causes a loss in value and can decrease the marketing price of valued good. It can also create a decrease in taxes and increase cash flow. One thing that cannot be depreciated is land. Wiley (2007) states that retaining funds, depreciation reduces “taxable income and retained earnings available for dividends” (p. 5). Capital assets have a chance to depreciate. Fixed assets include shipping, installation, preparation costs, repairs, additions, and improvements. It occurs and is calculated in debit and credit. There are many different depreciation methods. Some of these methods include straight-line, declining balance, and sum-of-the-years'-digits. (Noland, 2011) These classical depreciation methods are used to find annual depreciation. The accelerated depreciation methods, such as the sum-of years' digits method and the double declining method, allow companies to record little amounts of depreciation within a asset's later years of life. It also allows depreciation is larger amount to be recorded earlier in the life of an asset. Many assets show decline when it comes to the asset's productivity and fair value over time. (Noland, 2011) Issues are bound to occur within depreciation methods. Depreciation is usually computed on the nearest full month. Companies need to know how to compute depreciation when it comes to partial periods. Revenues serve as funds used for the replacement of occurring assets. Another issue is handling revisions of the rates associated with depreciation. The double declining balance method is an accelerated depreciation model. Due to this method doubling the rate of the straight line method, it was called the double declining balance method. This type of method is systematic and rational, as well as more flexible than the other methods. (Noland, 2011) It is also easier to apply the method to partial periods. Not to mention, it is acceptable to use this method for reporting taxes. (Noland, 2011) Currently, this method is likely to be the best candidate to produce to best cost allocation outcome. The declining balance method is not approved for tax depreciation and is mostly used for book depreciation. This method uses a fixed percentage to reduce the book value. Using the double declining balance method, the annual depreciation is found by the formula: d = 1 - (s / b) to 1/10 squared. The implied salvage value is found by using the formula: BV = B (1 -d)¹ Another method of depreciation is called sum-of-the-years'-digits. This method divides the number of time...
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