Question 5

Part A

Management has discretion in selecting the depreciation method for the companys property, plant and equipment.

1. (i) Discuss the criteria in selecting the appropriate depreciation method.

2. (ii) Comparing between straight-line and accelerated depreciation methods, outline and discuss the depreciation method that would result in higher quality of earnings over the life of an asset.

3. (iii) Briefly explain the effect of adopting straight-line and accelerated depreciation methods on the cash flows from operating activities. Part B

A number of factors may contribute to the profitability, especially the return on common equity (ROCE) of a company. The DuPont model is commonly used to identify the factors or characteristics of operation that affect the ROCE.

(i) Outline the factors or ratios in the DuPont model and explain the reasons that these factors affect the ROCE of a company.

(ii) Discuss how the business and financing strategies of a company would affect the ratios in the DuPont model.