Effective January 1, 2003, Zimmer Holdings changed the method it used to account for hand held instruments used by orthopedic surgeons. Prior to that date the cost of these instruments was carried as a prepaid expense, and when used, the cost was converted to an expense as part of selling, general, and administrative expenses. The new method recognizes these instruments as long-lived assets, and the cost are now included in property, plant. And equipment, and depreciated over a five-year period using the straight-linen method. The effect of the change was to increase reported earnings $26.8 million.
REQUIRED:
Explain how this accounting change affected the basic accounting equation, and how it affects the computation of the current ratio and the fixed assets turnover ratio.