The capital preservation allowance thought experiment? What's that?

We all know that the depreciation expense on an income statement measures the decline in the value of a firm’s fixed assets during the period, and the amount which needs to be replaced over time to maintain the firm’s productive capacity, right? WRONG! While depreciation expense may be a useful concept for external financial reporting, it fails completely when applied to managerial cost information used to support internal decision making. Doug Hicks leads us through an interesting thought experiment involving a family-owned business that needs to maintain its productive capabilities for future generations.

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