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 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
- CFA Level 2: Financial Reporting Part 1 - Introduction
- Financial Reporting: Important Definitions
- FIFO and LIFO Methods for Inventory Expensing
- Inventory Accounting and Financial Statements
- Inflation/Deflation and Inventory Accounting Analysis
- LIFO – Tax and Cash Flow Note
- LIFO Reserve and Converting LIFO Net Income to FIFO Net Income
- LIFO Liquidation
- Inventory at Net Realizable Value
- Impacts of LIFO and FIFO Inventory Methods on Selected Financial Ratios
- Accounting of Long-lived Assets - Expensing vs. Capitalizing
- Depreciation Methods for Property, Plant, and Equipment (PPE)
- Impact of Depreciation Method
- Depreciation - Important Points
- Impairment of Long-lived Assets
- Impact of Asset Impairment
- Revaluation of Property, Plant, & Equipment (PPE)
- Leasing versus Purchasing Assets
- Traditional Lessee Accounting in US GAAP
- Effects of Leases on Selected Financial Reporting Items for Lessees
- Lessor Accounting for Leases
- Lessors and Sales-Type Capital Leases
- Lessors and Direct Financing Capital Leases
- Effect of Leases on Financial Statements for Lessors
- Future of Lease Accounting
- CFA Level 2: Financial Reporting 1 - Recommendations
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