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Discuss how, in choosing the accounting methods below, the following ratios can be affected return on

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Discuss how, in choosing the accounting methods below, the following ratios can be affected — return on assets, quick ratio, profit margin, asset turnover:

(a)    A change in accounting method for depreciation from straight line to diminishing balance

(b)    Revaluation of a non-current asset upwards at the beginning of the current year

(c)    Recognising a loss through obsolescence of certain items inventory.

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Return on assets a In the early years of an assets life a change from straight line to diminishing balance will cause depreciation expense to rise and ...View the full answer


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Accounting

Accounting

ISBN: 978-1118608227

9th edition

Authors: Lew Edwards, John Medlin, Keryn Chalmers, Andreas Hellmann, Claire Beattie, Jodie Maxfield, John Hoggett

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Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.

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