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Lesson 13 of 26

Impact of Depreciation Method

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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Depreciation Methods for Property, Plant, and Equipment (PPE)

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Depreciation - Important Points

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Financial Reporting Part 1

26 lessons

Lessons

1
CFA Level 2: Financial Reporting Part 1 - Introduction
2
Financial Reporting: Important Definitions
3
FIFO and LIFO Methods for Inventory Expensing
4
Inventory Accounting and Financial Statements
5
Inflation/Deflation and Inventory Accounting Analysis
6
LIFO – Tax and Cash Flow Note
7
LIFO Reserve and Converting LIFO Net Income to FIFO Net Income
8
LIFO Liquidation
9
Inventory at Net Realizable Value
10
Impacts of LIFO and FIFO Inventory Methods on Selected Financial Ratios
11
Accounting of Long-lived Assets - Expensing vs. Capitalizing
12
Depreciation Methods for Property, Plant, and Equipment (PPE)
13
Impact of Depreciation Method
14
Depreciation - Important Points
15
Impairment of Long-lived Assets
16
Impact of Asset Impairment
17
Revaluation of Property, Plant, & Equipment (PPE)
18
Leasing versus Purchasing Assets
19
Traditional Lessee Accounting in US GAAP
20
Effects of Leases on Selected Financial Reporting Items for Lessees
21
Lessor Accounting for Leases
22
Lessors and Sales-Type Capital Leases
23
Lessors and Direct Financing Capital Leases
24
Effect of Leases on Financial Statements for Lessors
25
Future of Lease Accounting
26
CFA Level 2: Financial Reporting 1 - Recommendations
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