Lucy's Music Emporium purchased $50 million in fixed assets in January and their accountant told them that they would have to depreciate the assets over 20 years (they use the same depreciation calculations for shareholder reporting and income tax purposes).In December they learned that their accountant did not have a college degree and fired him.They hired a new accountant with a college degree and she told them that they could depreciate the assets over 15 years.How would the new depreciation assumption affect the company's financial statements relative to the old assumption?

Question

Quizplus · Accepted Answer

Depreciating assets over a shorter period (15 years instead of 20) increases annual depreciation expense, reducing taxable income and taxes paid, thus increasing cash flow.

Lucy's Music Emporium Purchased $50 Million in Fixed Assets in January