Assume that at least some rewards for the management team (and, hence, also other employees) are based on performance measured in terms of accounting income and returns on net assets..
1. Assume that at least some rewards for the management team (and, hence, also other employees) are based on performance measured in terms of accounting income and returns on net assets. Also, asume that all of these airlines are growing; that is, they are adding to their fleet size.
hat are the behavioral implications of each of three depreciation-related accounting policy choices: (1) depreciation patterns ( i.e. straight-line vs. accelerated, (2) estimated useful lives, and (3) residual values? Consider, at a minimum, the effects of each of these choices on decisions regarding:
a) replacements of aircraft in service;
b) pricing, assuming that prices are at least somewhat dependent on costs;
c) evaluations of routes or lines of business;
d) evaluations of managers, assuming that negotiated budgets provide the primary standards of performance.
2. Assume that in a particular US airline company there is a conflict between the benefits of conservatism vs. liberalism in depreciation accounting. Tat is, for this company conservatism in depreciation accounting is geatly preferred for financial reporting purposes (for whatever reason)but for internal purposes the company would be better off if the policies were more liberal, or vice versa. Would you recommend to the managers of this company that they adopt a third set of books? That is, should they maintain one set of books for financial accounting puroses, another set for tax purposes, and a third set for the purposes of running the business?
3. If the managers of a particular airline do not want to maintain a third set of books, should they tend to be conservative or liberal in their aircraft depreciation accounting? Explain.