Chapter 13, Problem 13.14ME

Describing the Effect of Accounting Decisions on Ratios

For each of the following three accounting choices, indicate the decision that will yield (a) a higher net profit margin and (b) a lower current ratio. If the decision does not affect the ratio, indicate “no effect.”

1. 1. Straight-line versus accelerated depreciation (in the first year of the asset’s life).
2. 2. FIFO versus LIFO (in periods of constantly rising costs and rising inventory levels).
3. 3. Straight-line depreciation with a four-year useful life versus a seven-year useful life (no residual value).