Firm A vs. Firm B: Depreciation Methods Comparison

Firm A Uses Sum-of-Digits, Firm B Uses Straight-Line Method

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Question

Firm A uses Sum-of-digits and Firm B uses straight-line method of depreciation. In the first year, which of the following is/are TRUE?

I. A shows higher equity than B.

II. A shows lower assets than B.

III. A shows a higher debt-to-equity ratio than B.

IV. A shows a higher debt-to-asset ratio.

Answers

Explanations

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A. B. C. D.

C

Sum-of-digits results in a higher depreciation in the first year. Hence, Firm A shows lower assets, lower income and hence lower equity. Thus, its debt-to-equity and debt-to-asset ratios are higher than B's.

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