Assume that Bev's Beverages Inc. (BBI) can double its depreciation expense for the upcoming year while sales revenue and tax rate remain. Prior to the change, BBI's net income after taxes was forecasted to be $4 million. Which of the following best describes the impact on BBI's financial statements versus the statements before the change? Assume that the company uses the same depreciation method for tax and shareholder reporting purposes.

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Quizplus · Accepted Answer

By doubling the depreciation expense, BBI's net income after taxes will decrease, since depreciation is a non-cash expense that reduces taxable income. This means that the initially forecasted net income of $4 million will be lowered. As a result, the value of net fixed assets on the balance sheet will decrease, since the depreciation expense is subtracted from the gross amount of fixed assets. The provision does not directly impact cash flow or tax payments, but it does affect the amount of taxable income, which indirectly influences the amount of taxes owed.

Assume That Bev's Beverages Inc