A ﬁrm has a calendar tax year. On January 10, the ﬁrm purchased depreciable equipment for cash. This purchase will create:

Question

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When a firm purchases depreciable equipment for cash, there is a current cash outflow as the firm pays for the equipment. However, the decrease in current net income will be lesser than the amount of the cash outflow because of depreciation expense. Depreciation expense spreads the cost of the equipment over multiple accounting periods, reducing the impact of the initial purchase on current net income. Therefore, choice B, "A current cash outflow and a lesser decrease in current net income," is the best choice.

A ﬁRm Has a Calendar Tax Year