One primary reason management may choose a particular depreciation method is:
A)to save cash for the replacement of the plant asset.
B)to avoid violation of debt covenants tied to net income.
C)to decrease the cash flows of the company.
D)to hide judgment errors that managers have made during the accounting period.

Question

Quizplus · Accepted Answer

Management may choose a particular depreciation method to avoid violating debt covenants that are tied to net income. Depreciation affects net income, and using a method that results in a lower net income could trigger a violation of these covenants.

One Primary Reason Management May Choose a Particular Depreciation Method