One item that can be altered is a firm’s depreciation expense. If a firm is assuming that an asset—such as a building or factory—will wear out in 10 years, it subtracts (or depreciates) one-tenth of the building’s value from its earnings each year. As you can imagine, the longer the depreciation period, the smaller the annual hit to earnings. Therefore, if a firm suddenly decides that an asset has a longer useful life and stretches out the depreciation period, it’s essentially pushing costs out into the future and inflating current earnings.
