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Questions and Answers
- What is the purpose of matching the cost of a resource with the revenues it helps to generate over the long term?
The purpose is to spread out (match) the cost of the resource with the revenues it helps to generate, especially for assets used up over a period longer than 1 year, in order to accurately reflect the impact on income over time.
- What are the consequences of adding the full expense of a 10-year asset in the first year?
The income in the first year is understated due to the full expense, while the income in years 2 – 10 is overstated due to the lack of any expense, leading to inaccurate financial reporting.
- What factors should be considered in determining the depreciation method for an asset?
The factors to consider include capturing all costs associated with the asset, estimating the expected life of the asset and its salvage value, and determining whether the asset gets used up proportionally during its life.
- What is the difference between amortization and depreciation?
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- What additional consideration must for-profit health care organizations take into account when deciding on a depreciation method?
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