you should recognize that the life expectancy, the salvage value, and the al-location method a company uses can fundamentally affect reported earn-ings. In general, if a company is conservative and depreciates its assets rapidly, it will tend to understate current earnings, and vice versa. Taxes A second noteworthy feature of depreciation accounting involves taxes. Most U.S. companies, except very small ones, keep at least two sets of fi-nanciai records: one for managing the company and reporting to share-holders and another for determining the firm's tax bill. The objective of the first set is, or should be, to accurately portray the company's financial performance. The objective of the second set is much simpler: to mini-mize taxes. Forget objectivity and minimize taxes. These differing objec-tives mean the accounting principles used to construct the two sets of books differ substantially. Depreciation accounting is a case in point. Re-gardless of the method used to report to shareholders, company tax books will minimize current taxes by employing the most rapid method of de-preciation over the shortest useful life the tax authorities allow. This dual reporting creates complications on U.S. companies' pub-lished financial statements. To illustrate, the "provision for income taxes" of $18.3 million appearing on Ametek's 200 I income statement does not equal taxes paid; rather, it is the tax payable according to the accounting techniques used to construct Ametek's published statements. But because the company used different accounting techniques when reporting to the tax authorities-techniques intended to defer the payment of tax until fu-ture years-taxes paid in 2001 are actually greater than $18.3 million. To confirm this, note that the company has two tax accounts on the liability side of its balance sheet called "income taxes payable" and "deferred in-come taxes," and one account on the asset side called "prepaid income taxes." The liability accounts reflect tax obligations not yet paid, while the asset account reflects prepayments. The collective change in these ac-counts indicates that Ametek's tax liability fell $10.1 million over the year; hence, taxes paid must have been $28.4 million ($28.4 = $18.3 + $10.1). Here is a more detailed accounting:
I l 12 Part One .-lssrssmg th,· Fi111mci11I I li-11/th of the Finn Provision for income taxes + Reduction in income taxes payable -Increase in deferred taxes - Reduction in prepaid taxes Taxes paid $18.3 10.8 (0.3) (0.4) $28.4 Because the $ 10.1 million payment was for past liabilities incurred, !t g~n-erates a reduction in net tax liabilities in Ametek's balance sheet, bnngmg the remaining tax liability down to $24.9 million ($24.9 million is the sum o f Ametek's three tax accounts at year-end 2001).