Suppose two hospitals are identical in all ways except that one is newer and the other older. Which statement about comparative financial statement analysis is most correct?

• A. The newer hospital will have higher depreciation expense.
• B. The older hospital will have lower net fixed assets.
• C. Net fixed assets differences do not affect ratios.
• D. None of the above statements is correct.

Answer: (D)

Asset age affects how numbers in financial statements are reported, and depreciation is not determined by age alone. Depreciation expense depends on asset cost, the depreciation method used, the asset’s salvage value, and how much of the asset’s life remains. A newer hospital has more recently acquired assets, but that doesn’t guarantee higher depreciation, since the older hospital could have assets that are already heavily depreciated or nearing end of life, or use different schedules. Without specifics on policies and asset mix, there isn’t a definite rule that the newer hospital must show higher depreciation expense.

Net fixed assets are gross fixed assets minus accumulated depreciation. A newer hospital may have higher gross fixed assets, but it also has less accumulated depreciation; the older hospital may have lower gross fixed assets yet more accumulated depreciation. This means net fixed assets can be higher, lower, or about the same, depending on the exact mix and timing of depreciation. So the statement about the older hospital having lower net fixed assets isn’t guaranteed.

Net fixed assets do affect ratios that use asset bases, such as fixed asset turnover and various leverage and efficiency measures. Therefore claiming that differences in net fixed assets don’t affect ratios isn’t correct.

So, none of the above statements is universally correct.