Accelerated depreciation methods for financial reporting are most likely to have which of the following effects on a company’s financial ratios during the early years of an asset’s life?
a. Lower current ratio.
b. Higher asset turnover ratio.
c. Lower debt-to-equity ratio.
(b). But why can’t the answer also be (a)?
Thanks in advance.
because depreciation is applied to long-term assets, and the current ratio deals with more liquid short-term assets
Current ratio as mheithy stated is current and PPE non-current.
But truthfully, the only way depreciation can affect current ratio is through inventories when depreciation of factory buildings and equipment are capitalised as part of indirect cost of production. So, if anything, it will increase current ratio rather than decrease.