What are the differences among valuation, depreciation, amortization, and depletion?

Is it appropriate to calculate depreciation using two different methods? Why?

What does the Annual Report you are using for class say about depreciation? Response 1 Depreciation, depletion and amortization are used as a basis to allocate the historical cost of an asset over its useful live in order to conform with the idea that earnings of the company are matched accordingly with relative expenses to include the wear and tear of the assets. Depreciation is used with reference to tangible fixed assets because the permanent continuing and gradual fall in book value is possible only in the case of fixed assets. Depletion is the allocation of a wasting assets depletable cost over the period where natural recourses are extracted and put into production such as oil, trees ECT. Amortization in account is the allocation of an intangible cost or revalued mount minus its residual value over its useful life. Depletion Expense and Amortization expense are similar to Depreciation Expense, as all three involve allocating the cost of a long-term asset to an expense over the useful life of the asset. There is no cash involved. Per Home Depots Annual report Depreciation and Amortization decreased 5.3% to $1.6 billion for fiscal year 2010 from 1.7 billion for fiscal 2009. The decrease in depreciation and amortization as a percent of sales was primarily due to smaller depreciable fixed asset base compared to last year, arising in fully depreciated assets. Also as of January 30, 2011 Home Depot guaranteed a 1 billion dollar senior secured amortizing term loan in connection with the sale of HD supply. The balance sheet for home depot dated 01-30-11 shows accumulated depreciation and amortization of 13,325,000. It is acceptable and common for companies to depreciate its plant assets by using the straight line method on its financial statements, while using an accelerated method on its income tax return. A company could also be depreciating its equipment over ten years for its financial statements, while using seven years for its income tax return. Even the depreciation for financial statements could consist of some assets being depreciated using the units of production or units of activity method, while other assets are depreciated using the straight line method. Response 2 Depreciation is defined as the process of allocating to expense the cost of plant asset over the useful life in a rational and systematic manner. So basically that means that as a plant asset ages it costs the company as an expense because it falls in line with the revenue recognition principal and stays in accordance with the GAAP.

Depletion is defined as the allocation of the cost of a natural resource to expense in a rational and systematic manner over the resources useful life. Obviously the only difference between the depreciation and depletion is what item, natural resource or plant asset, is essentially wearing over a given time period.

Amortization is similar to both of the examples above in that each have to do with cost allocation, however amortization is the allocation of only intangible assets like copyrights or patents. Simply put, the three terms are all the same, but each has a categorical difference in what the allocation is for.

Finally, Valuation is simply putting a value on an asset at any given time. For example if a truck that had been purchased a year ago gets used up and is not as valuable as before. Vehicles gain mileage over years and the value of the vehicle goes down. Valuation is simply looking at an asset and determining how much it is worth after use.

It is appropriate to use different methods to calculate depreciation because different assets can be measured against revenue in many different ways.

FedEx has a detailed description in which they explain that they use the strait line method for amortization and depreciation. The statement also explains that much of the depreciation is associated with software and airline. They stress that overhaul costs are capitalized when such costs are determined to extend the useful life of the asset or are part of the cost to acquire the asset. Response 3
Valuation: the asset (investments or inventories) should be recorded and disclosed at current market price regardless of whether price is above or below cost. Depreciation: means the allocation of the cost of asset (or tangible asset) to the periods in which services are received from the asset. Amortization: means the systematic write-off / charged to expense of the cost of an intangible asset over the periods of its economic usefulness. Depletion: means the pro rata allocation of cost of minerals or natural resources to the units removed or occurred. It computed by dividing the cost of the natural resources by the estimated available number of units.

It is appropriate to calculate depreciation using two different methods, many companies use two or more methods of depreciation. There are several different methods which could be used and each is used to account for the cost of a company's fixed asset over time. The depreciation method chosen affects the accounts of financial statements. Therefore, it is important to understand the different methods and which is best suited for your company.