What is the effect of using the double declining balance method on financial statements?
Practice Questions
1 question
Q1
What is the effect of using the double declining balance method on financial statements?
Higher net income in early years.
Lower net income in early years.
No effect on net income.
Increased cash flow.
The double declining balance method results in higher depreciation expenses in the early years, leading to lower net income.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of using the double declining balance method on financial statements?
Solution: The double declining balance method results in higher depreciation expenses in the early years, leading to lower net income.
Steps: 5
Step 1: Understand that the double declining balance method is a way to calculate depreciation, which is how we spread the cost of an asset over its useful life.
Step 2: Realize that this method calculates depreciation at a faster rate in the early years of the asset's life compared to other methods.
Step 3: Note that higher depreciation expenses in the early years mean that the company will report lower profits (net income) during those years.
Step 4: Understand that lower net income can affect financial statements, such as the income statement, making the company appear less profitable in the short term.
Step 5: Recognize that while net income is lower initially, it may increase in later years as depreciation expenses decrease.
