Financial Reports: How to Read the Balance Sheet for Accumulated Depreciation - dummies

Financial Reports: How to Read the Balance Sheet for Accumulated Depreciation

By Lita Epstein

On a balance sheet, you may see numerous line items that start with accumulated depreciation. On the financial report, these line items appear under the type of asset whose value is being depreciated or shown as a total at the bottom of long-term assets. Accumulated depreciation is the total amount depreciated against tangible assets over the life span of the assets shown on the balance sheet.

Although some companies show accumulated depreciation under each of the long-term assets, it’s becoming common for companies to total accumulated depreciation at the bottom of the balance sheet’s long-term assets section. This method of reporting makes it harder for you to determine the actual age of the assets because depreciation isn’t indicated by each type of asset. You have no idea which assets have depreciated the most.

The age of machinery and factories can be a significant factor in trying to determine a company’s future cost and growth prospects. A firm with mostly aging plants needs to spend more money on repair or replacement than a company that has mostly new facilities. Look for discussion of this in the management’s discussion and analysis or the notes to the financial statements.

If you don’t find this information there, you have to dig deeper by reading analyst reports or reports in the financial press. For example, the toy companies Mattel and Hasbro both show their property, plant, and equipment on one line in the balance sheet, but you find a complete breakdown in the notes to the financial statements.