Impact of Depreciation Method
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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. |
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