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Business
Accounting
Assume a firm with a single investment in a noncurrent asset

Assume a firm with a single investment in a noncurrent asset

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Assume a firm with a single investment in a noncurrent asset being some plant to produce its products. The firm purchased this plant eight years ago and it has a useful life of ten years. This plant is depreciated on a straight-line basis. What is the effect of the accounting for this plant on the firms ROE computed from its financial statements. a. The computed ROE will be biased upward b. The computed ROE will be an unbiased estimate of the true ROE c. The computed ROE will be biased downward d. The computed ROE could be biased upward or downward e. no alternative given in this question is correct Answer is A, please explain with an example
Transcribed Image Text:Assume a firm with a single investment in a noncurrent asset being some plant to produce its products. The firm purchased this plant eight years ago and it has a useful life of ten years. This plant is depreciated on a straight-line basis. What is the effect of the accounting for this plant on the firms ROE computed from its financial statements. a. The computed ROE will be biased upward b. The computed ROE will be an unbiased estimate of the true ROE c. The computed ROE will be biased downward d. The computed ROE could be biased upward or downward e. no alternative given in this question is correct Answer is A, please explain with an example
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