Question

Assume an asset is in its early years and ignore the effect of taxes. An accelerated method of depreciation, relative to straight-line depreciation, will most likely result in a decrease of:

Select one:

A. Cash flow from operations.

B. Shareholders' equity.

C. Asset turnover ratio.

Answer 1

Solution:

B) Shareholders equity,

Acceleated method of deprecation can be defined as fixing a large amount at the initial stages and low amount at the last periods. But in the case of straight line of depreciation a fixed amount is charged till it's useful life. Asset's value will decrease over time when depreciation is used.when the value of assets decreased at that moment onwards the value of return on shareholders equity will started to decline.

Rest of the options are wrong. Because depreciation increases the cash flow from operations and asset's turn over ratio.