Preview

Business Management

Powerful Essays
Open Document
Open Document
4264 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Business Management
7th International Scientific Conference “Business and Management 2012” May 10-11, 2012, Vilnius, LITHUANIA

ISSN 2029-4441 print / ISSN 2029-929X online ISBN 978-609-457-116-9 CD doi:10.3846/bm.2012.036 http://www.bm.vgtu.lt
© Vilnius Gediminas Technical University, 2012

THE INFLUENCE OF DEPRECIATION POLICIES ON FINANCIAL STATEMENT ANALYSIS: A CASE STUDY OF AIRLINE INDUSTRY Xiaosong Zheng1, 2, Yingya Guo3, Jiali Xu4
Tallinn School of Economics and Business Administration, Tallinn University of Technology, 19086 Tallinn, Estonia Email: xiaosong.zheng@ttu.ee 2, 3, 4 Sydney Institute of Language and Commerce, Shanghai University, 201800 Shanghai, China Email: xiaosong.zheng@shu.edu.cn; 3yyguo09@shu.edu.cn; 4zerozita@shu.edu.cn Abstract. The public and professionals are gradually taking the quality of financial statement of airline’ companies into account since the global airline industry plays a vital role within the international business community. However, methods of airline financial reporting and disclosure vary significantly from country to country due to different accounting standards. This disparity in accounting disclosure represents a large obstacle to the growing globalization of business as international investors need comparable financial information to assess the financial health of different companies. This paper will illustrate one of issues observed in the airline industry called the estimation of depreciation expenses, which exerts a huge influence on the stated revenue since depreciation is a major expense in the industry. Assisted by classical financial analysis, we find that companies can perform different depreciation estimation practices which are allowed by different accounting practices to manage earnings. Keywords: financial statement, depreciation policies, airline industry, estimation, ratio. Jel classification: M41
1

1. Introduction The airline industry has faced complex regulations and divergent accounting standards (KPMG


References: Best, B. 1990.The uses of financial statements. [online] [cited 1 Juanuary 2012]. Available from Internet: . Choi, F.D.S.; Mueller, G.G. 1984. International accounting. Englewood Cliffs, NJ: prentice Hall. Chang, L. S.; Most, K. S. 1981. An Internatioanl Comparison of Investor Uses of Financial Statements, The International Journal of Accounting Education and Rearch. 273 X. Zheng; Y. Guo; J. Xu CFRA, The Center for Financial Research and Analysis, Inc. 1999. Overview of Airline Industry Depreciation Policies. Chong, W. l.; Tower, G.; Taplin, R. 2000. Determinants and harmonization of Asia Pacific manufacturing companies. Asian Review of Accounting, 8(2), 81-103. http://dx.doi.org/10.1108/eb060730 Delta Airline, 2010. The Corporate Report. China Southern Airline Company, 2010. The Corporate Report. Douglas, W.; Michael, W. 1984. Economies of Density versus Economies of Scale: Why Trunk and Local Service Airline Cost Differ, The Rand Journal of Economics 4 (15): 471-489. Drake, W. 1998. A Financial Analysis of Southwest Airline Co. Southwest Airline: Twenty-Six Years of “LUV”:1-15. Healy, P. 1985. The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics 7: 85-107. http://dx.doi.org/10.1016/0165-4101(85)90029-1 Holland, D.; Ramsay, A. 2003. Do Asutalian Companies Manage Earings to Meet Simple Earings Benchmarks? Accounting & Finance, 1(43): 41-62. http://dx.doi.org/10.1111/1467-629X.00082 IASC, International Accounting Standards Committee. 2000. London, England: International Accounting Standards Committee. John, P.; Paul, D. 2007. Costs under Regulation and Deregulation: The case of US Passenger Airline. Economic Record 4(66): 308-321. KPMG and IATA. 1992. Accounting policies, disclosure and financial trends in the International Airline Industry: a survey conducted by KPMG in association with the International Air Transport Association. Montreal, Canada: International Air Transport Association. KPMG. 2005. KPMG’s disclosres handbook 20052006: Accounting and Financial Report in the Global Airline Industry. Keeler, T. 1972. Airline regulation and market performance, The Bell Journal of Economics and Management Science 2 (3): 399-424. http://dx.doi.org/10.2307/3003030 Mohrman, M. B. 2009. Depreciation of Airplanes & garbage trucks: Information value & Fraud prevention in Financial Reporting, Accounting Education: 105-107. Miller, D. 1994. Sources and Consequences of Competitive Inertia: A Study of the U.S. Airline Industry 1 (39): 1-23. Morrell, S. 2007. Ailrline Finance. Table 2.9 Depreciation ren comparation for 2005-2006:20-23. ISBN 978-0-7546-7000-1. Oum, H.; Zhang, Y. 1991. Utilization of Quasi-fixed inputs and estimation of cost functions, Journal of Transport Economics and Policy 2 (25):399-424. Penman, S. H.; Zhang, X. J. 2002. Accounting sonservatism, the quality of earnings, and stock returns. The accounting Review 2(77):237-264. http://dx.doi.org/10.2308/accr.2002.77.2.237 Purvis, S.; Gernon, H.; Diamond, M. A. 1991. The IASC and its comparability project: prerequisites for success. Accounting horizons 5 (2): 25-44. Samula, B.; Mistro, D. 2004. Developing a Cost Model for Running an Airline Service: 128-134. ISBN 1-920-1723-2 Phillips, J.; Pincus, M.; Rego, S.; Wan, H. 2004. Decomposing Changes in Deferred Tax Assets and Liabilities to Isolate Earings Management Activities, Journal of Ameircan Taxtation Association 26:43-66. http://dx.doi.org/10.2308/jata.2004.26.s1.43 Subramanyam, K.R.; Wild, J.J. 2008. Financial Statement Analysis, Tenth Edition, McGraw-Hill, 223-235 p. ISBN 9780071263924. Tamari, M. 1978, Financial Ratios: Analysis and Prediction, Paul Elek Ltd. Tan, C. W. et al. 2002. Empires of the sky: determinants of global airline’ accounting-policy choices, the International Journal of Accounting 3(37): 277-299. Tarry, C. 2010. Market Outlook: Feeling under depreciated. AIRLINE BUSINESS. Taylor, P.; Turley, S. 1986. The regulation of accounting. Oxford, England: Blackwell. Tower, G.; Hancock, P.; Taplin, R. H. 2002. A Regional Study of Listed Companies’Compliance with International Accounting Standards, Accounting Forum, 3(23): 293-305. http://dx.doi.org/10.1111/1467-6303.00016 Wahlen, J. 1999. A review of the earnings management literature and its implications for standard setting. Accounting Horizons 13: 365-383. http://dx.doi.org/10.2308/acch.1999.13.4.365 Watts, R. L.; William, E. 2002. Simon Graduate School of Business Administration, Conservatism in Accounting: 1-25. Wensveen, J. 2010. Air Transportation: A Management Perspective. Seventh Edition, Ashgate. 4 p. ISBN: 978-1-4094-3063-6. 274
Continue Reading
View Writing Issues

You May Also Find These Documents Helpful

  • Good Essays

    Qrb 501 Week 1 Capital Budgeting Case
    • 796 Words
    • 4 Pages

    Qrb 501 Week 1 Capital Budgeting Case

    Company A started with $250,000 and increased in revenue by 10% each year up to 5 years. Therefore, at the end of 5 years the revenue totaled $146,410. We subtracted the annual expenses from the yearly revenue to determine the profit before depreciation or the profit before the drop in value. Depreciation moves the cost of an asset to depreciation expense during the asset 's useful life. Depreciation expense results when the purchase price of a fixed asset is reduced over time, or its useful life (Keown, Martin, & Petty, 2014). In Corporation A, the Depreciation expense is $5,000 a year. We deducted the $5,000 year depreciation from the profit to obtain the profit before tax. The tax rate of 25% was deducted from the profit before tax to find the net income. The 5 Year Projected Cash Flow is the net income plus the…

    • 796 Words
    • 4 Pages
    Good Essays
    Read More
  • Better Essays

    Acc 561 Financial Statements Differential
    • 910 Words
    • 4 Pages

    Acc 561 Financial Statements Differential

    Financial statements provide documentation of a company’s financial history for a set timeframe. One of the financial statement used by investors, creditors, and mangers is the balance sheet. The second statement used by accountant’s income statement, which is also important to shareholders. The third statement is the retained earnings statement, and the fourth financial statement is the statement of cash flows. Each financial statement has a different purpose and shows different aspects of the company’s finances. However, these financial statements are integrated and work together to provide shareholders financial information. This paper will defines the four financial statements while explaining the financial statement most suitable for either an investor, creditor, or management.…

    • 910 Words
    • 4 Pages
    Better Essays
    Read More
  • Powerful Essays

    auditing case study--Virgin Australia
    • 3794 Words
    • 14 Pages

    auditing case study--Virgin Australia

    Three major audit risks are identified and assessed in the third part of the report. These relate to revenue and income accounts， the PPE and intangible assets. The accuracy of revenue and income may be questionable due to of unearned passenger revenue obligations and future obligations in relation to credit voucher redemption rates. The PPE account is possibly overstated as it is hard to predict the next scheduled heavy maintenance especially for the new aircraft model and value of the leasehold properties are easily to be overstated. Finally the intangible asset account can be overstated, which is indicated by the the difficulty of the valuation of Sabre Sonic software and fair value of goodwill.…

    • 3794 Words
    • 14 Pages
    Powerful Essays
    Read More
  • Better Essays

    Harnischfeger Case
    • 1476 Words
    • 5 Pages

    Harnischfeger Case

    2. What is the effect of the depreciation accounting method change on the reported income in…

    • 1476 Words
    • 5 Pages
    Better Essays
    Read More
  • Powerful Essays

    Continental Airlines
    • 1514 Words
    • 7 Pages

    Continental Airlines

    The short-term solution of decreasing flight capacity by 11% affects many factors in the operation of Continental Airlines. At first, it seems that a reduced number of flights and available seat miles would only benefit an airline that is failing to fill its flights and is losing out on profits because of it. On the other hand though, one must look deeper into the effects to find which costs are directly related to a reduction in flight capacity and which costs will largely be unaffected by the proposed solution. After examining the ten operating costs that Continental incurs throughout quarterly operation, I concluded that some of these costs are fixed or would not have a reaction to changes in flight capacity. In contrast, there are a few costs that are directly related to flight capacity and would see a large reduction with the cut in capacity. Table 1 below shows the ten costs that are incurred, details about each cost, and how they vary with a change in flight capacity.…

    • 1514 Words
    • 7 Pages
    Powerful Essays
    Read More
  • Powerful Essays

    Depreciation: Airplanes and Garbage Trucks
    • 1114 Words
    • 5 Pages

    Depreciation: Airplanes and Garbage Trucks

    Your answers to the questions below should be clear, well-written, free of grammar and spelling errors, double-spaced with margins of at least one inch on all sides, and word-processed. In preparing this assignment, you may discuss the issues with each other or with anyone else, but your written answers must be your own work. If you need to quote someone else in your answer, you must give credit to your source. This assignment is due at the beginning of class on February 13, and should be printed and submitted in hard copy in class. No late papers will be accepted. If you cannot be in class on February 13, you may email your paper to stuerkep@umsl.edu before the start of class on February 13. The assignment must be included as an attachment to the email in a single file in either Word or .pdf format. Please include your name on the first page of the assignment, and name the file with your name and the name of the assignment (example: John Smith Airplanes assignment.docx). We will discuss the assignment in class on the 12th. It would be a good idea to bring a second copy of your paper to have with you during the class discussion. Part I: Airplanes Attached are excerpts taken from the 2004 annual reports of Northwest Airlines, Delta Airlines and United Airlines. Assume that on January 1, 2005, each of the three airlines purchases a new Boeing 757 for $75 million. Each airline estimates that the residual value will be 5% of cost. Each airline uses the average depreciation period that is consistent with its policies as stated in the Appendix, found on page 3. On January 1, 2009, each firm sells the plane. First, assume that Northwest sells its plane for $55 million, Delta sells its plane for $60 million, and United sells its plane for $65 million (Sale Price I). Second, assume each firm sells its plane for $60 million (Sale…

    • 1114 Words
    • 5 Pages
    Powerful Essays
    Read More
  • Better Essays

    Acc 280 Financial Statements Paper
    • 1007 Words
    • 5 Pages

    Acc 280 Financial Statements Paper

    The purpose of this paper is to define accounting, and identify the four basic financial statements. The paper also explains how the different financial statements are interrelated to each other and why they are useful to managers, investors, creditors, and employees.…

    • 1007 Words
    • 5 Pages
    Better Essays
    Read More
  • Powerful Essays

    WC Paper
    • 2653 Words
    • 8 Pages

    WC Paper

    In this research project, we are evaluating two sectors from an analysis of the financial statements of five companies from each sector. One of the sectors that we will be analyzing is the financial sector. Under this sector, we are focusing on commercial banking. The top five companies for our analysis are J.P. Morgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs. The criterion in choosing these companies is U.S. based firms ranked by the highest revenues in 2013. An important distinction that sets this industry apart from others is the heavily involvement of the government. For example, the Federal Reserve sets borrowing limits, interest rates, and how much deposits in a vault are to be held. The government has great authority, especially with fluctuations of interest rates, in the profitability of the financial sector. These banking institutions are currently regulated at the highest degree since the financial crisis of 2008. The second sector we will analyze is the airline industry. An airline is a company that provides air transport services for traveling passengers and freight. Airlines either lease or own their aircrafts that they supply these services with. Airlines take passengers across the world servicing everyone from business passengers, tourists, and business entities that use services for commerce of products. The airline industry is a service industry which is structured based on the service the airline provides, what the airline is in business to transport, and the revenue potential of the particular airline.…

    • 2653 Words
    • 8 Pages
    Powerful Essays
    Read More
  • Good Essays

    Financial Statement Restatement Paper
    • 750 Words
    • 3 Pages

    Financial Statement Restatement Paper

    Kimmel, P.D., Weygandt, J. J., Kieso, D.E. (2007). Financial accounting; Tool for business decision making (4th ed.). Hoboken, NJ: John Wiley & Sons, Inc.…

    • 750 Words
    • 3 Pages
    Good Essays
    Read More
  • Powerful Essays

    Frequent Flyer Accounting
    • 1292 Words
    • 6 Pages

    Frequent Flyer Accounting

    Tan, C.W., Tower, G., Hancock, P. and Taplin, R. 2002, ‘Empires of the sky: determinants of global airlines ' accounting-policy choices. ' International Journal of Accounting, vol.37, pp 277-299.…

    • 1292 Words
    • 6 Pages
    Powerful Essays
    Read More
  • Good Essays

    Delta and Singapore Airlines Case:
    • 991 Words
    • 4 Pages

    Delta and Singapore Airlines Case:

    Some of the differences in the method chosen for depreciation can be based on the use and maintenance schedule of the fleet. In the case, it states that Delta gleaned 21% of its revenues from international travel. In contrast, 56% of Singapore’s revenues are for travel outside of Asia, and it can also be inferred that while 44% of its revenue come from Asia, not all of those are inner continental. If you assume…

    • 991 Words
    • 4 Pages
    Good Essays
    Read More
  • Good Essays

    Depriciation
    • 728 Words
    • 3 Pages

    Depriciation

    2. Are the differences in the ways that the two airlines account for depreciation expense significant? Why would companies depreciate aircraft using different depreciable lives and salvage values? What reasons could be given to support these differences? Is different treatment proper?…

    • 728 Words
    • 3 Pages
    Good Essays
    Read More
  • Good Essays

    Questions Of Cases
    • 677 Words
    • 3 Pages

    Questions Of Cases

    2. Are the differences in the ways that the two airlines account for depreciation expense…

    • 677 Words
    • 3 Pages
    Good Essays
    Read More
  • Satisfactory Essays

    Depreciation at Delta Airlines and Singapore Airlines
    • 468 Words
    • 2 Pages

    Depreciation at Delta Airlines and Singapore Airlines

    Delta Airlines and Singapore Airlines both adopted straight-line method for depreciation. The difference between the two lied in their estimates of residual value and useful life of the aircraft. Singapore Airlines assumed a much shorter useful life and higher residual value of the aircraft. We view the differences as significant since Singapore Airlines depreciated the value of its aircraft almost twice as fast as Delta Airlines did.…

    • 468 Words
    • 2 Pages
    Satisfactory Essays
    Read More
  • Powerful Essays

    Income Statement Presentation
    • 8937 Words
    • 36 Pages

    Income Statement Presentation

    Often, much more detail is provided regarding the sources of revenues and the types of expenses. This presentation is appropriate for assessing the performance of the period covered by the income statement, but our interest in knowing income extends beyond simply assessing the past period's performance. Another important use of the income number is to help predict a firm's future performance. In apparent acknowledgment of this fact, the accounting rules require three types of transactions to be presented differently than in the simple example above. The three types of transactions that are presented differently are extraordinary items, discontinued operations, and changes in accounting policy. The events that…

    • 8937 Words
    • 36 Pages
    Powerful Essays
    Read More

Related Topics