The Effects of Alternative Depreciation Policies on Reported Profits.

The article focuses on the effects of alternative depreciation policies on reported profits. It also reports on the depreciation of a newly acquired asset by an accelerated method results in relatively low taxes early in the asset's life and higher taxes later on as the depreciation tax allowance declines. If operating revenues and all expenses other than depreciation are constant, and if the profits reported to stockholders are computed by using straight line depreciation, then after-tax earnings follow a reverse pattern. Depending on the rate and duration of asset growth, on debt policy, and in the case of regulated utilities, on how the benefits of the tax savings are distributed among ratepayers and stockholders, the different accounting treatments produce widely varied patterns of reported profits. The complicated interrelationships among these variables make it virtually impossible to study the problem algebraically, and the volume of calculations prevents one from working out the relationships manually. However, the problem is ideally suited for simulation analysis, and this is the principal analytic tool used in the study.