Speedy Company uses the double-declining-balance method to depreciate its property, plant, andequipment and Turtle Company uses the straight-line method. The two companies are exactly alikeexcept for the difference in depreciation methods.Required:1. Identify the financial ratios discussed in this chapter that are likely to be affected by the difference in depreciation methods.2. Which company will report the higher amount for each ratio that you have identified inresponse to requirement 1? If you cannot be certain, explain why.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Speedy Company uses the double-declining-balance method to
equipment and Turtle Company uses the straight-line method. The two companies are exactly alike
except for the difference in depreciation methods.
Required:
1. Identify the financial ratios discussed in this chapter that are likely to be affected by the difference in depreciation methods.
2. Which company will report the higher amount for each ratio that you have identified in
response to requirement 1? If you cannot be certain, explain why.
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