The president of the Federal Company was somewhat confused by accounting terminology.

The president of the Federal Company was somewhat confused by accounting terminology. He recently read in a financial journal that companies were financing their capital expenditures by using depreciation allowances and retained earnings. An inspection of the most recent balance sheet revealed that depreciation allowances were $20,000,000 and retained earnings were $40,000,000. This information added to his confusion, for his treasurer had recently informed him of the desirability of postponing capital expenditures because of a lack of cash. Prepare a brief report that will clarify the terminology. Explain why financial analysts often speak of capital expenditures being financed from depreciation allowances. Are they correct?

 

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