Assume that Congress recently passed a provision that will enable Barton's Rare Books (BRB) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate.Prior to the new provision, BRB's net income after taxes was forecasted to be $4 million.Which of the following best describes the impact of the new provision on BRB's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Question

Quizplus · Accepted Answer

Doubling the depreciation expense will accelerate the reduction of the book value of BRB's fixed assets, leading to a decrease in net fixed assets on the balance sheet. This is because depreciation expense reduces the carrying amount of fixed assets over time. The provision does not directly affect sales revenue, tax rate, or cash flows, but by increasing depreciation expense, it reduces taxable income, potentially leading to lower tax payments and thus not directly reducing free cash flow or increasing net income.

Assume That Congress Recently Passed a Provision That Will Enable