Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.

Question

​Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.

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Restating the question to frame the context: two firms, both under GAAP, started two years ago with $1 million in identical fixed assets and neither bought nor sold any fixed assets during the period. The prompt asks whether they would report the same net fixed assets now.
Option 1: True. This is not correct. Even though both firms follow GAAP and began with the same asset base, net fixed assets are affected by depreciation and possible impairments. GAAP allows different depreciation methods (for example straight-line vs. declining balance), different estimated useful lives, and different salvage values. Over two years, these choices typically produce different accumulated depreciation amounts, which reduces net fixed assets differently for each firm. Impairment or revaluation events (though less common under GAAP than IFRS, they can occur in certain circumstances) could also affect net fixed assets. Therefore, identical starting assets do not guarantee identical net fixed assets after two years.
Option 2: False. This is the correct evaluation. The key idea is that depreciation expense is a function of method and estimates, which can diverge between two otherwise similar companies. Because both firms started with $1 million in fixed assets and have not done any purchases or sales, the only changes in net fixed assets arise from depreciation (and any impairment). Since depreciation methods, useful lives, and salvage values are not mandated to be the same across firms, the net fixed assets are likely to differ, leading to different reporting on the balance sheets. In other words, identical asset bases at start do not ensure identical net asset values after two years under GAAP.
A few subtle points to consider for future clarity:
- Even with the same asset class, the depreciation expense each firm records can accumulate to different balances over two years depending on the chosen method and estimates.
- If one firm experiences impairment, the net fixed assets could be reduced further beyond depreciation.
- Residential or commercial asset mix, if not perfectly identical, would also influence depreciation patterns and net book values.
- Since the question specifies GAAP and no asset additions or disposals, the primary drivers of any discrepancy are accounting choices rather than transactions. This reinforces why the statement asserting sameness would not hold in general.

Business Finance Chapter 03 Quiz

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