Depreciation

Expect a method-comparison item: given identical assets, you must rank net income, total assets, or ROE across firms, where the tell is a longer useful life or higher residual value that lowers periodic expense and inflates early-year earnings. A second pattern hands you cost, salvage, and life and asks for double-declining-balance (rate = 2/life applied to beginning book value, ignoring salvage in the formula but never depreciating below it — the floor) versus units-of-production. Watch the component-depreciation wrinkle: IFRS requires depreciating significant parts separately, while US GAAP permits but rarely uses it. Remember accelerated methods only shift timing — total lifetime depreciation is identical across methods.

The classic trap is conflating depreciation with the broader expenses family: it is the systematic allocation of capitalized cost, not a directly-recognized period cost like interest, and capitalizing versus expensing understates current expense while inflating assets and early-year earnings. Don’t confuse it with leverage, either — depreciation is an operating expense, but its tax shield (depreciation × tax rate) cuts cash taxes, indirectly boosting operating cash flow and easing debt service.