The article focuses on the effects of alternative depreciation policies on reported profits. It also reports on the depreciation of a newly acquired asset by an accelerated method results in relatively low taxes early in the asset's life and higher taxes later on as the depreciation tax allowance declines. If operating revenues and all expenses other than depreciation are constant, and if the profits reported to stockholders are computed by using straight line depreciation, then after-tax earnings follow a reverse pattern. Depending on the rate and duration of asset growth, on debt policy, and in the case of regulated utilities, on how the benefits of the tax savings are distributed among ratepayers and stockholders, the different accounting treatments produce widely varied patterns of reported profits. The complicated interrelationships among these variables make it virtually impossible to study the problem algebraically, and the volume of calculations prevents one from working out the relationships manually. However, the problem is ideally suited for simulation analysis, and this is the principal analytic tool used in the study.

Donald H. Woods, Eugene F. Brigham, Stockholder Distribution Decisions: Share Repurchases or Dividends?, The Journal of Financial and Quantitative Analysis, Vol. 1, No. 1, Proceedings of the First Annual Meeting of the Western Finance Association (Mar., 1966), pp. 15-26

This article presents a study on the normalization versus flow through for utility companies using liberal tax depreciation in accounting in the U.S. The results of an analysis of the simulation model raise a question as to whether a utility commission is justified in permitting companies under its jurisdiction to continue using straight line depreciation for tax purposes. The model demonstrates that using taxes computed on the basis of straight line depreciation as an allowable cost of service results in a higher cost to rate-payers than would be necessary if the important benefits of accelerated depreciation were utilized in rate-making. The company could increase its cash flows and thus obtain interest free capital in the form of deferred taxes. By refusing to use accelerated depreciation the company is refusing to accept this capital contribution. Thus, the model lends support to the thesis that neither the customers nor the stockholders benefit from straight line depreciation. Accordingly, there is reason to question whether it is advisable for a utility commission to permit a company under its jurisdiction to disregard the tax savings afforded by liberalized depreciation.