In the Schweser 07 Pg 171 of Book 3, it says “With accelerated methods, net income (net of depreciation) is increasing each year as well, and the return on investment increase even more in the later years” yet in a few sentences later it is written, “A firm that chooses an accelerated depreciation method (eg. DDB) instead of using straight -line, will tend to have greater depreciation expense and lower net income” So which is right? Accelerated methods --> higher / lower net income? Thanks.
I think the second quote makes sense in the beginning years. Because with accelerated methods, depreciation expense is decreasing every year (meaning net income increasing over the years). Therefore, in comparison, a DDB firm tends to have higher depreciation expense and lower net income (IN THE BEGINNING YEARS).
both are the second one referes to the beggining years.the ddb expense will be higher in first years than straight line which will create a lower net income. so the second is true Every year the expense will become smaller and smaller (you use a declining balance in the calculation) which will create an increasing net income over the years, in comparison with straight line which creates a constant depreciation expense and net income.so the first one is true too. They refer do different points in time
Accelerated method of deppreciation will result in lower net income and greater depreciation expense in early years and greater income and lower depreciation expense in later years. If you consider Schweser notes according to this that makes sense for me.