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 IMPACTEDSTRAIGHT-LINEACCELERATED
Earnings, Equity, Profit MarginsHigher, as depreciation expense is lower in early years.Lower, as depreciation expense is higher in early years.
Current RatioNo 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 FlowNo change.No change.
Asset TurnoverLower, as asset values are higher in the early years.Higher, as asset values are depreciated up front.
Debt-to-Equity RatioLower, 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.

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