Opportunity to manipulate earnings Sherwin-Williams and PPG Industries are both companies that produce wall coverings, such as paint, among other products. Although they uses similar assets to conduct their businesses, the estimated lives they use to depreciate those assets vary, as shown in the following table:

Managers have significant flexibility in setting the estimated useful lives of depreciable assets, and as the table shows, PPG Industries uses longer estimated lives for its assets than does Sherwin-Williams.
Required
a. How does using a longer estimated life for a depreciable asset potentially affect its earnings?
b. Would using a longer estimated life for a depreciable asset be more likely to affect a company€™s fixed or variable costs?
c. In the past, some companies, not PPG, have been accused of deliberately overestimating the useful lives of their companies€™ depreciable assets. Speculate as to what would cause them to do this.
d. Review the standards of ethical conduct shown in Exhibit 1.15 of Chapter 1 and comment on which, if any, of the ethical standards are violated by deliberately overestimating the useful lives of depreciable assets.
e. Comment on the provisions of the Sarbanes-Oxley Act that are designed to prevent a company€™s executives from deliberately overestimating the useful lives of depreciable assets.

Transcribed Image Text:

Estimated Useful Lives PPG Industries Sherwin-Williams Asset Category Buildings Machinery and equipment Other 20-40 years 5-25 3-20 5-40 years 5-20 3-10