Answer to Question #62839 in Accounting for asif

Question

If company A uses accelerated depreciation method as compared to company B which uses straight line method, then what will be impact on the follwoing, whether they will increase, decrease or will be same. Plz explain

A) Interest Coverage ratio
B) Return on equity
C) Current Ratio
D) Debt to Equity Ratio

Answer 1

Selected depreciation method affects the amount of profits, since depreciation is recognized as an expense. Thus, the depreciation method chosen will affect the indicators used in determining whose profit, including Interest Coverage ratio and Return on equity. Accelerated depreciation method increases the expenditure period, which reduces profits. Arguably, the indexes of the company A will:
A) Interest Coverage ratio - decrease
B) Return on equity - decrease
C) Current Ratio - will be same
D) Debt to Equity Ratio - will be same