If a company is using the double declining method to depreciate its assts, is its ROA initially greater than or less than a company using the straight line method? The answer to this questions says it will be intially lower because NI will be lower. However wouldnt Assets be lower too?
yes but by the same amount.
so if net income is 10 000$, assets is 1 000 000$ and 1st year depreciation is 5000 more than straight line dep. then :
straight line
ROA = 10000/1000000 =1%
wit double declining method:
NI: 10000 - 5000 = 5000
assets : 1000000-5000 = 995000
roa = 5000/995000 = 0.5%
in one in a million case assets < NI but i dont think this is a problem here.
yes but by the same amount.
so if net income is 10 000$, assets is 1 000 000$ and 1st year depreciation is 5000 more than straight line dep. then :
straight line
ROA = 10000/1000000 =1%
wit double declining method:
NI: 10000 - 5000 = 5000
assets : 1000000-5000 = 995000
roa = 5000/995000 = 0.5%
in one in a million case assets < NI but i dont think this is a problem here.
More to do with ratio.
Same amount of drop in both numerator and denominator. But since former is smaller than the latter, the ratio will decrease as the drop accounts for a greater pecentage in the numerator.