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    Depreciation Distortion in Financial Statements

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    What are some possible motivations that a company might have to either understate or overstate the amount of depreciation expense that it records for a given period? How might a financial analyst detect deliberate distortions by management? What other parties do you think should be monitoring the actions of management to prevent such distortions?

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    Depreciation is debited in the Profit and loss account as an expense.Therefore, the understatement or overstatement of Depreciation will show increase/decrease in profit.

    If the intention of the management is to show high profit , earnings per share and market value of the share is high in the market,then the management will show less depreciation.The main purpose behind the understatement of depreciation is to woo the investors to invest in the shares of the Company.If the Company wants to expand its business and wants to go for public issue, then it needs to show the good status of Net Income and the high market value of the share.High ...

    Solution Summary

    The solution contains the meaning of depreciation,how the depreciation can be used to distort the true financial position of the firm, who can detect those distortions