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

Question

Quizplus · Accepted Answer

Doubling depreciation expense will reduce BBI's net income after taxes, as depreciation is an expense that is subtracted from revenue to determine net income. This reduction in net income will result in a decrease in retained earnings on the balance sheet, which will in turn reduce net fixed assets. Therefore, option D is the correct choice. Option A is incorrect because the provision will not affect net cash flow as it is a non-cash expense. Option B is incorrect because tax payments are calculated based on taxable income, which includes depreciation expense, so doubling depreciation will not necessarily increase tax payments. Option C is incorrect because increasing depreciation does not increase net fixed assets.

Assume That Bev's Beverages Inc