Financial Terms Straight line depreciation

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# Definition of Straight line depreciation

## Straight line depreciation

An equal dollar amount of depreciation in each accounting period.

## STRAIGHT-LINE DEPRECIATION

A depreciation method that depreciates an asset the same amount for each year of its estimated
life.

## straight-line depreciation

This depreciation method allocates a uniform
amount of the cost of long-lived operating assets (fixed assets) to each
year of use. It is the basic alternative to the accelerated depreciation
method. When using the straight-line method, a business may estimate a
longer life for a fixed asset than when using the accelerated method
(though not necessarily in every case). Both methods are allowed for
income tax and under generally accepted accounting principles (GAAP).

## straight-line depreciation

Constant depreciation for each year of the asset’s accounting life.

# Related Terms:

## Accelerated depreciation

Any depreciation method that produces larger deductions for depreciation in the
early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule
allowed for tax purposes, is one such example.

## Bank line

line of credit granted by a bank to a customer.

## Capital market line (CML)

The line defined by every combination of the risk-free asset and the market portfolio.

## Cash flow time-line

line depicting the operating activities and cash flows for a firm over a particular period.

## Characteristic line

The market model applied to a single security. The slope of the line is a security's beta.

## Demand line of credit

A bank line of credit that enables a customer to borrow on a daily or on-demand basis.

## Depreciation

A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to amortize the cost of acquiring Long term assets over the useful life of the assets.

## Depreciation tax shield

The value of the tax write-off on depreciation of plant and equipment.

## Double-declining-balance depreciation

Method of accelerated depreciation.

## Euro lines

lines of credit granted by banks (foreign or foreign branches of U.S. banks) for Eurocurrencies.

## Euro straight

A fixed-rate coupon Eurobond.

## Investment product line (IPML)

The line of required returns for investment projects as a function of beta
(nondiversifiable risk).

## Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

## Linear programming

Technique for finding the maximum value of some equation subject to stated linear constraints.

## Linear regression

A statistical technique for fitting a straight line to a set of data points.

## Log-linear least-squares method

A statistical technique for fitting a curve to a set of data points. One of the
variables is transformed by taking its logarithm, and then a straight line is fitted to the transformed set of data
points.

## Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

## Mortgage pipeline

The period from the taking of applications from prospective mortgage borrowers to the
marketing of the loans.

## Mortgage-pipeline risk

The risk associated with taking applications from prospective mortgage borrowers
who may opt to decline to accept a quoted mortgage rate within a certain grace period.

## Old-line factoring

Factoring arrangement that provides collection, insurance, and finance for accounts receivable.

## Revolving line of credit

A bank line of credit on which the customer pays a commitment fee and can take
down and repay funds according to his needs. Normally the line involves a firm commitment from the bank
for a period of several years.

## Security characteristic line

A plot of the excess return on a security over the risk-free rate as a function of
the excess return on the market.

## Security market line

line representing the relationship between expected return and market risk.
Security market plane A plane that shows the equilibrium between expected return and the beta coefficient
of more than one factor.
Security selection
See: security selection decision.

## Simple linear regression

A regression analysis between only two variables, one dependent and the other explanatory.

## Simple linear trend model

An extrapolative statistical model that asserts that earnings have a base level and
grow at a constant amount each period.

## Straight value

Also called investment value, the value of a convertible security without the con-version option.

## Straight voting

A shareholder may cast all of his votes for each candidate for the board of directors.

## Sum-of-the-years'-digits depreciation

Method of accelerated depreciation.

## Swingline facility

Bank borrowing facility to provide finance while the firm replaces U.S. commercial paper
with eurocommercial paper.

## Depreciation

A technique by which a company recovers the high cost of its plant-and-equipment assets gradually during the number of years they’ll be used in the business. depreciation can be physical, technological, or both.

## Depreciation

An expense that spreads the cost of an asset over its useful life.

## Earnings before interest, taxes, depreciation and amortization (EBITDA)

The operating profit before deducting interest, tax, depreciation and amortization.

## Line item

Generic types of assets, liabilities, income or expense that are common to all businesses and
used as the basis of financial reporting, e.g. rent, salaries, advertising etc.

## Accumulated depreciation

A contra-fixed asset account representing the portion of the cost of a fixed asset that has been previously charged to expense. Each fixed asset account will have its own associated accumulated depreciation account.

## Depreciation expense

An expense account that represents the portion of the cost of an asset that is being charged to expense during the current period.

## Straight-line

A method of depreciation.

## accelerated depreciation

(1) The estimated useful life of the fixed asset being depreciated is
shorter than a realistic forecast of its probable actual service life;
(2) more of the total cost of the fixed asset is allocated to the first
half of its useful life than to the second half (i.e., there is a
front-end loading of depreciation expense).

## accumulated depreciation

A contra, or offset, account that is coupled
with the property, plant, and equipment asset account in which the original
costs of the long-term operating assets of a business are recorded.
The accumulated depreciation contra account accumulates the amount of
depreciation expense that is recorded period by period. So the balance in
this account is the cumulative amount of depreciation that has been
recorded since the assets were acquired. The balance in the accumulated
depreciation account is deducted from the original cost of the assets
recorded in the property, plant, and equipment asset account. The
remainder, called the book value of the assets, is the amount included on
the asset side of a business.

## bottom line

A commonly used term that refers to the net income (profit)
reported by a business, which is the last, or bottom line, in its income
statement. As you undoubtedly know, the term has taken on a much
broader meaning in everyday use, referring to the ultimate or most important
effect or result of something. Not many accounting-based terms have
found their way into everyday language, but this is one that has.

## depreciation

Refers to the generally accepted accounting principle of allocating
the cost of a long-term operating asset over the estimated useful
life of the asset. Each year of use is allocated a part of the original cost of
the asset. Generally speaking, either the accelerated method or the
straight-line method of depreciation is used. (There are other methods,
but they are relatively rare.) Useful life estimates are heavily influenced
by the schedules allowed in the federal income tax law. depreciation is
not a cash outlay in the period in which the expense is recorded—just
the opposite. The cash inflow from sales revenue during the period
includes an amount to reimburse the business for the use of its fixed
assets. In this respect, depreciation is a source of cash. So depreciation is
added back to net income in the statement of cash flows to arrive at cash
flow from operating activities.

## net income (also called the bottom line, earnings, net earnings, and net

operating earnings)
This key figure equals sales revenue for a period
less all expenses for the period; also, any extraordinary gains and losses
for the period are included in this final profit figure. Everything is taken
into account to arrive at net income, which is popularly called the bottom
line. Net income is clearly the single most important number in business
financial reports.

## Security Market Line

A graph illustrating the equilibrium relationship between the
expected rate of return on securities and their risk as measured by
the beta coefficient

## line employee

an employee who is directly responsible for
achieving the organization’s goals and objectives

## linear programming

a method of mathematical programming used to solve a problem that involves an objective function and multiple limiting factors or constraints long-term variable cost a cost that was traditionally viewed as a fixed cost

## Management Accounting Guidelines (MAGs)

pronouncements of the Society of Management Accountants of
Canada that advocate appropriate practices for specific
management accounting situations

## product line margin

see segment margin

## red-line system

an inventory ordering system in which a red
line is painted on the inventory container at a point deemed
to be the reorder point

## regression line

any line that goes through the means (or averages) of the set of observations for an independent variable and its dependent variables; mathematically, there is a line of “best fit,” which is the least squares regression line

## tax benefit (of depreciation)

the amount of depreciation deductible for tax purposes multiplied by the tax rate;
the reduction in taxes caused by the deductibility of depreciation

## tax shield (of depreciation)

the amount of depreciation deductible
for tax purposes; the amount of revenue shielded
from taxes because of the depreciation deduction

## timeline

representation of the amounts and timing of all
cash inflows and outflows; it is used in analyzing cash flow
from a capital project

## Depreciation

Reduction in value of fixed or tangible assets over some period
for accounting purposes. See Amortization.

## Accelerated depreciation

Any of several methods that recognize an increased amount
of depreciation in the earliest years of asset usage. This results in increased tax benefits
in the first few years of asset usage.

## Accumulated depreciation

The sum total of all deprecation expense recognized to date
on a depreciable fixed asset.

## Depreciation

Both the decline in value of an asset over time, as well as the gradual
expensing of an asset over time, roughly in accordance with its level of usage or
decline in value through that period.

## depreciation tax shield

Reduction in taxes attributable to the depreciation allowance.

## line of credit

Agreement by a bank that a company may borrow at any time up to an established limit.

## security market line

Relationship between expected return and beta.

## Depreciation

a) Of capital stock: decline in the value of capital due to its wearing out or becoming obsolete.
b) Of currency: decline in the exchange rate.

## Depreciation Allowances

Tax deductions that businesses can claim when they spend money on investment goods.

## 45-Degree Line

A line representing equilibrium in the goods and services market, on a diagram with aggregate demand on the vertical axis and aggregate supply on the horizontal axis.

## Depreciation

The systematic and rational allocation of the cost of property, plant, and equipment
over their useful lives. Refer also to amortization and depletion.

## Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

An earningsbased measure that, for many, serves as a surrogate for cash flow. Actually consists of working
capital provided by operations before interest and taxes.

## EBDDT - Earnings before depreciation and deferred taxes

This measure is used principally by
firms in the real estate industry, with the exception of real estate investment trusts, which typically
do not pay taxes.

## Other-than-Temporary Decline in Market Value

The standard used to describe a decline in market value that is not expected to recover. The use of the other-than-temporary description as
opposed to describing a loss as permanent stresses the fact that the burden of proof is on the
investor who believes a decline is only temporary. That investor must have the intent and financial
ability to hold the investment until its market value recovers. In the absence of an ability to
demonstrate that a decline is temporary, the conclusion must be that a decline in value is other
than temporary, in which case the decline in value must be recognized in income.

## Depreciation

Amortization of fixed assets, such as plant and equipment, so as to allocate the cost over their depreciable life.

## Formalized Line of Credit

A contractual commitment to make loans to a particular borrower up to a specified maximum during a specified period, usually one year.

## Line of Credit

An agreement negotiated between a borrower and a lender which establishes the maximum amount against which a borrower may draw. The agreement also sets out other conditions, such as how and when money borrowed against the line of credit is to be repaid.

## Operating Line of Credit

A bank's commitment to make loans to a particular borrower up to a specified maximum for a specified period, usually one year.

## line of credit

A revolving source of credit with a pre-established limit. You access the funds only as you need them, and any amount that you pay back becomes accessible to you again. Unlike a personal loan, a line of credit permits you to write cheques and make bank machine withdrawals, and requires you to pay interest only on the funds that you actually use.

## online bill payment

The electronic payment of a bill via the Internet. The specified amount of the bill is electronically debited from your account.

## personal line of credit (PLC)

A revolving source of credit with a pre-established limit. You access the funds only as you need them, and any amount that you pay back becomes accessible to you again. Unlike a personal loan, a PLC permits you to write cheques and make bank machine withdrawals, and requires you to pay interest only on the funds that you actually use.

## secured loan or line of credit

A lump sum of funds (loan), or a revolving source of credit with a pre-established limit (line of credit), for which the customer must provide collateral.

## Personal Line of credit (Credit Insurance)

A bank's commitment to make loans to a borrower up to a specified maximum during a specific period, usually one year.

## Flow-through method

The practice of reporting to shareholders using straight-line depreciation and
accelerated depreciation for tax purposes and "flowing through" the lower income taxes actually paid to the
financial statement prepared for shareholders.

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