When Your New finance Director Doesn’t Grasp the Basics of Depreciation
Recently, our company welcomed a new finance Director, a decision that initially filled me with optimism given her impressive credentials. With over 20 years of experience in corporate finance, a background with a Big 4 firm, and an MBA from a reputable institution, she seemed like the perfect fit for our senior Accounting team.
However, I encountered a surprising revelation just yesterday during our monthly close process. As I was guiding her through the intricacies of our financial system, she posed a startling question: why we continue to incur what she referred to as “wasted money on depreciation expenses” when, in her view, we are not actually spending any money each month.
At first, I assumed she was testing my knowledge. I explained the fundamental principle of depreciation: that it serves to allocate the cost of an asset over its useful life, ensuring that expenses align with the revenues generated from that asset. To my dismay, she responded with a blank stare, expressing confusion as to why we would continue to expense an item that had already been paid for.
As I began to break down the process further, delving into the core concepts of Generally Accepted Accounting Principles (GAAP) and illustrating the journal entries involved, she requested a detailed step-by-step explanation, claiming the entire process appeared overly complex. Despite investing half an hour in this basic overview, her questions continued.
One particularly troubling query arose when she questioned why we couldn’t fully expense a newly purchased $50,000 server to immediately capitalize on a tax write-off, instead of spreading the expense over its useful life. When I touched on the importance of understanding capitalization thresholds and distinguishing between assets and expenses, her response was to suggest that perhaps we should consult with our tax advisor as something seemed amiss.
To add to my disbelief, she is set to review our financial statements for accuracy before they are presented to the board next week.
It’s crucial to note that we are not a fledgling startup; our company generates $15 million in revenue and operates in the manufacturing sector, where more stringent Accounting practices should be the norm.
Adding to the complexity of the situation, she also expressed her bafflement regarding discrepancies she noticed between our cash flow statement and the profit and loss (P&L) statement. When I pointed out that net income does not equate to cash flow, her confusion only deepened.
This experience has left me pondering how someone with such an extensive resume
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