Impact of Depreciation Methods on Financial Statements
The table below summarizes the early year impacts on selected financial reporting items by choosing the straight-line method versus an accelerated depreciation method.
| ITEM IMPACTED | STRAIGHT-LINE | ACCELERATED |
| Earnings, Equity, Profit Margins | Higher, as depreciation expense is lower in early years. | Lower, as depreciation expense is higher in early years. |
| Current Ratio | No impact because the current ratio relates to short-term assets. | No impact because the current ratio relates to short-term assets. |
| Total Pre-Tax Cash Flow | No change. | No change. |
| Asset Turnover | Lower, as asset values are higher in the early years. | Higher, as asset values are depreciated up front. |
| Debt-to-Equity Ratio | Lower, as equity is higher driven by higher earnings in the early years. | Higher, as equity is lowered in the early years with an elevated depreciation expense. |
LESSONS
- Capitalizing Vs. Expensing Costs
- Financial Reporting of Intangible Assets
- Depreciation Methods for Property, Plant, and Equipment (PPE)
- Impact of Depreciation Methods on Financial Statements
- Depreciation – Important Points
- Amortization of Intangible Assets
- Revaluation Model for Fixed Assets
- Impairment of Long-lived Assets
- Impact of Asset Impairment
- Derecognition of PPE and Intangible Assets
- Disclosures Related to PPE and Intangible Assets
- Financial Reporting of Investment Property Vs. PPE
R Programming Bundle: 25% OFF
Get our R Programming - Data Science for Finance Bundle for just $29 $39.
Get it now for just $29