Determining the Average Useful Life of Assets

At the time of purchase, assets are recorded on the balance sheet at historical cost. Over time, the reported value is reduced by the total (accumulated) depreciation expense, resulting in a net property and equipment value. The notes to the financial statements will provide both the historical cost and the accumulated depreciation if it is not on the face of the balance sheet. In addition, either the cash flow statement or the income statement should provide the depreciation expense recorded in the most recent period.

Consider a company that reports the following:
depreciation.jpg

The average useful life of the assets can be estimated by dividing historical cost by annual depreciation expense. In this case, 17,239/575 = 29.9 years.

This estimate works best for companies that use straight-line depreciation, and comparisons among companies that use different depreciation methods or estimated useful lives will be affected by those choices.

For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis, Ratio Analysis

See also:
  • Estimating the Average Remaining Useful Life of a Company’s Assets
  • Estimating the Average Age of a Company’s Assets
  • Intangible Assets
  • Creating a Situational Profile for an Individual Investor
  • Cash Flow Return on Investment (CFROI)
  • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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