Overview
Discussion Board, 11 Accounting Questions on Wiley Plus & 16 Business Statistics Questions on Pearson My Lab
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Discussion Board
Chapter 10 reviews accounting practices surrounding the acquisition, valuation, and disposal of property, plant, and equipment, and further addresses the accounting for intangible assets. Key metrics used in the analysis of a company’s assets (which includes these longer-term assets) are also reviewed.
Required: With that in mind, the following scenario is provided for your evaluation. Answer the questions that follow:
Diaz and Gonzalez are two competitors in the moving and storage business. Diaz has historically used the straight-line method to depreciate its property, plant, and equipment whereas Gonzalez has used the declining balance method. Most companies in this business sector are using the straight-line method to depreciate their property, plant, and equipment.
While at an industry meeting, Gonzalez boasted about its high asset turnover ratio and claimed that it was primarily driven by the company’s efficient use of its property, plant, and equipment. Diaz questioned Gonzalez’s claim noting that efficiencies like these would ordinarily result in increased sales, yet sales have remained relatively flat. Diaz, therefore, contended that the high asset turnover may simply be the result of Gonzalez’s accounting practices, namely, the manner in which it has chosen to depreciate its property, plant and equipment.
Questions:
1. Is there validity to Diaz’s comment? Why or why not?
2. Does the selection of a depreciation method for property, plant, and equipment impact the asset turnover ratio? If so, explain how.