Firm A uses Double Declining and Firm B uses Sum-of-digits method of depreciation. In the first year, which of the following is/are TRUE?
I. A shows lower assets than B -
II. A shows higher retained earnings than B
III. A shows a higher debt-to-equity ratio than B
IV. A shows a lower debt-to-asset ratio
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A. B. C. D.Explanation
Double Declining results in a higher depreciation in the first year. Therefore, Firm A shows lower assets, lower income and hence lower equity in the first year.
Thus, its debt-to-equity and debt-to- asset ratios are higher than B's.