What is the impact of using different depreciation methods on financial ratios?

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Q: What is the impact of using different depreciation methods on financial ratios?

Solution: Different depreciation methods can affect profitability ratios, as they influence net income and asset values.

Steps: 6

Step 1: Understand what depreciation is. Depreciation is the way businesses spread the cost of an asset over its useful life.
Step 2: Learn about different depreciation methods. Common methods include straight-line, declining balance, and units of production.
Step 3: Know that depreciation affects net income. When depreciation is higher, net income is lower, and vice versa.
Step 4: Realize that net income is used to calculate profitability ratios, like return on assets (ROA) and return on equity (ROE).
Step 5: Understand that different methods can lead to different net income figures, which will change the profitability ratios.
Step 6: Remember that depreciation also affects the value of assets on the balance sheet, which can influence other financial ratios.