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Chapter 35: Public Utility Depreciation Policies

·         Graham notes that in the public utility industry the depreciation polices have a large impact on the earnings. Depreciation is not a mere book keeping conception, because for the most part it registers an actual diminution of capital values, for which adequate provision must be made if creditors or owners are to avoid deceiving themselves.

·         In the majority of cases the depreciation charges are consumed or offset over a period of time by even larger cash expenditures made for replacements or extensions. More often than not, therefore, depreciation charges are eventually found to be related to actual cash outlays and turn out to be as truly an expense of the business as wages or rents. Minority cases are fairly numerous in which a good part of the depreciation reserve remains unexpended over a long period of time. In these instances a reduction of the annual charges may sometimes be justified in the investor’s calculations, as we shall later explain. The broad principle remains, however, that an adequate depreciation allowance is essential in arriving at a fair statement of earnings.

·         Some companies deduct some of the depreciation directly from surplus (shareholder equity) instead of going through the income account and the analyst must adjust earnings accordingly.

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