The Daily Technical #82: Explain the concept of beta (β).

Good morning. Welcome to the 82nd edition of The Daily Technical. You’re here for one reason so let’s dive in.

First time reading? Sign up here.

OVERVIEW OF YESTERDAY’S QUESTION
Do companies prefer straight-line or accelerated depreciation?

Companies choose straight-line because it reports lower depreciation in an asset's early years compared to accelerated methods.

This results in higher net income and EPS initially, which is appealing for those prioritizing near-term earnings.

While accelerated depreciation eventually reduces depreciation costs later, companies, particularly those frequently acquiring new assets, stick with straight-line to sustain desired earnings reports without concern for a future flip in depreciation costs.

Additionally, for GAAP reporting purposes, most companies prefer straight-line depreciation for consistency and simplicity.

Common Mistakes

1. Ignoring the focus on initial earnings. Highlight the importance of initial earnings visibility for investor confidence.

2. Assuming that the preference depends solely on financial strategy without considering regulatory guidelines. Always remember that GAAP often guides the depreciation method choice, favoring straight-line for consistency and simplicity.

3. Missing the impact of ongoing asset purchases on depreciation methods. Note that continual asset acquisition delays the point at which accelerated methods become less advantageous.

TL;DR

• Companies often prefer straight-line depreciation for GAAP reporting due to its lower early-year depreciation.

• Straight-line method also enhances initial net income and EPS, aligning with a focus on short-term earnings.

• Accelerated depreciation offers lower costs later, but its benefits come later in an asset's life.

TODAY’S QUESTION
Explain the concept of beta (β).

Type your answer here. Within 60 seconds you’ll have custom feedback in your inbox.

THAT’S A WRAP
See you tomorrow,

Mike Lukasevicz
Founder @ HirePrep