Financial Education

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:

The average age of the assets can be estimated by dividing accumulated depreciation by annual depreciation expense. In this case, 6,584/575 = 11.5 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

Translating A Foreign Subsidiary’s Results into the Parent Company’s Currency

Return on Assets

Determining the Average Useful Life of Assets

The Analytical (Variance-Covariance) Method for Estimating Value at Risk (VaR)