Reading 36: Long-Lived Assets - LOS d ～ Q1-3 black, assets, several, respect, methods

mayanfang1

Q1. Roger Margotta, the CFO of Brainchild, Inc., is considering several alternative methods of depreciation for long-term assets. With respect to double-declining method of depreciation, which of the following statements is the most accurate?

A)   Current ratio will increase over the life of the asset.

B)   Asset turnover ratio will decrease over the life of the asset.

C)   Return on Investment will increase over the life of the asset.

Q2. Which of the following statements comparing straight-line depreciation methods to alternative depreciation methods is least accurate? Companies that use:

A)   accelerated depreciation methods will decrease the amount of taxes in early years.

B)   accelerated depreciation methods will increase the total amount of depreciation expense over the life of an asset.

C)   the units-of-production method to depreciate assets will overstate income during periods of low production.

Q3. A company is switching from straight-line depreciation to an accelerated method of depreciation. Assuming all other revenue and expenses are at the same levels for the next period, switching to an accelerated method will most likely increase the company’s:

A)   fixed asset turnover ratio.

B)   total assets on the balance sheet.

C)   net income/sales ratio.

mayanfang1

答案和详解如下：

Q1. Roger Margotta, the CFO of Brainchild, Inc., is considering several alternative methods of depreciation for long-term assets. With respect to double-declining method of depreciation, which of the following statements is the most accurate?

A)   Current ratio will increase over the life of the asset.

B)   Asset turnover ratio will decrease over the life of the asset.

C)   Return on Investment will increase over the life of the asset.

Correct answer is C)

With the use of any accelerated method of depreciation, the deductions in assets and net income are greatest in the early years. For DDB, the greatest impact is year 1. After year 1, net income will increase, increasing ROI.

Q2. Which of the following statements comparing straight-line depreciation methods to alternative depreciation methods is least accurate? Companies that use:

A)   accelerated depreciation methods will decrease the amount of taxes in early years.

B)   accelerated depreciation methods will increase the total amount of depreciation expense over the life of an asset.

C)   the units-of-production method to depreciate assets will overstate income during periods of low production.

Correct answer is B)

Accelerated depreciation methods will not change the total amount of depreciation expense over the life of an asset. Accelerated depreciation methods will increase the amount of depreciation expense in the early years of the asset’s life, but the depreciation expense will be less in the latter years of the asset’s life.

Q3. A company is switching from straight-line depreciation to an accelerated method of depreciation. Assuming all other revenue and expenses are at the same levels for the next period, switching to an accelerated method will most likely increase the company’s:

A)   fixed asset turnover ratio.

B)   total assets on the balance sheet.

C)   net income/sales ratio.

Correct answer is A)

The use of an accelerated depreciation method will increase depreciation expenses early in the asset’s life. The book value of the asset will be lower. Fixed asset turnover ratio (sales/fixed assets) will increase, because the book value of the fixed assets will be lower.

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