Question

Analytics Ltd. has just hired two rookie analysts. They are examining the income statement General Motors (GM) and there is something that does not seem to add up: while GM is a capital intensive company, the depreciation expense in the profit and loss account is very low. In fact, the depreciation expense has been low during all the years for which they have access to data. The rookie analysts believe that GM may be manipulating the depreciation expense to boost their earnings. Based on the information provided, do you think that the rookies are right? What other data (if any) will you use to assess whether GM is manipulating the depreciation expense?

Answer 1

Capital Intensive Company normally requires more/large amount of liquid as investment in order to manufacture/produce a good or render a service. Hence, they need more investments which can be possible when they are attract Investors more to make them to invest in their business by showing more profits.

In the given case, the GM company is just manipulating the data and showing less depreciation in order to show more profits so that it can attract more investors to invest more.

The other data is that, as informed in the first paragraph of this answer, it requires large amount of investments to manufacture/produce a good or render a service so it has more share of fixed assets like Property, Plant & Equipment etc. Therefore, the depreciation expense will always more on such fixed assets but GM Company is showing less depreciation. It means, GM Company is just manipulating the data and showing less depreciation in order to show more profits to attract the investors. Hence, rookies are right in their decision.