Simple answers for depreciation question

Last week, Rob Yust, assistant vice president for business affairs said confusion about depreciation stemmed from the general public’s “lack of understanding.”

If depreciation, a representation of an asset’s cost over the span of it’s life, is not a cash cost then the removal of the $3.7 million line item would bring Missouri Southern back into the green.

However, Linda Eis, University treasurer, says it’s simply not a matter of rearranging figures.

“The most important thing I wish people would understand is that you can’t just take out that $3.7 million and that’s the end of the story,” she said. “You must turn around and replace it with the items we paid cash for. You cannot do one with out the other if you want a true picture.”

While depreciation is not a cash cost, it is a representation of expenses, such as payment on bonds.

“You don’t see “Bond payment: $800,000.” [on the budget],” she said. “If I pull out depreciation, now I have to put, for example, “Bond payment” because that’s not on that statement.”

Jeff Gibson, University budget director, said in response to public questions about depreciation’s role in the budget situation, that depreciation is a complex accounting problem but it is certainly “not un-understandable.”

“Suppose if you went out and started a taxi cab company, so you bought a cab and it cost you $30,000, and it lasted you 3 years, that was the expected life of your cab.” said Dr. Mark Comstock, professor of accounting, “There are two things you can do with it. You can expense it all in the first year, that’s the first option, you say ‘taxi cab expense,” then you have other expenses on top of it and you have your revenues.

“Needless to say you have an abysmal first year. Well in year two, you wouldn’t have that expense. You had all your sales and you look really good for year two and year three.

“The alternative would be, to take that $30,000 taxicab and for year one say ‘taxi expense,’ $10,000, or as we’re calling it now, depreciation. That would at least keep your revenue consistent and you would be mindful all along that you’re not driving around in a free taxi just because you expensed it in year one.”

While cash costs are paid up front, the value of said spending is spread out over the life of the object.

“If it were not for the concept of depreciation, the expense and the cost would hit the bottom line immediately,” Gibson said, “That’s what depreciation is really about. It’s spreading the cost of the asset over its useful life.”