You are the owner of a successful small business. You have just finished a year of large capital investments using borrowed funds. Your banker requires quarterly financial statements to monitor the financial health of your company. The banker has warned you that if profit margins decline she may have to increase interest rates on the loans you have with the bank to reflect increased loan risk from the banker’s perspective. You fear profit margins have declined and decide to add all repairs and maintenance expenditures to the value of the assets on the Balance Sheet. You also decide to switch to straight line depreciation for all of your medium term assets instead of the declining balance method you have been using.
- Are your changes in depreciation accounting ethical or legitimate depreciation assumptions?
- What will be the effects on the Balance Sheet, Income Statement, and profit margins of your actions?
- How does a switch from declining balance to straight line depreciation affect the depreciation amount and the income statement?