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QUESTION 2: [12 Marks] In the recent board meeting, it was agreed that the depreciation rate for plant and machinery should be changed. Currently, plant
QUESTION 2: [12 Marks] In the recent board meeting, it was agreed that the depreciation rate for plant and machinery should be changed. Currently, plant and machinery are depreciated at 12.5% per annum using a straight-line method. Under a new policy, the assets will be depreciated at 10% per annum using a straight-line method. The chairman is concerned about the impact of this change in estimate on financial ratios and whether the company will still be able to meet the requirements of the bank. Required: Advise the chairman what the effect will be on the following ratios. Provide reasons for your answer. a. Gross profit b. Net profit c. Return on assets d. Total asset turnover e. Debt ratio f. Return on equity ~~~~~~ (2) (2) (2) (2) (2) (2)
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