AOS Industries Statement of Cash Flows for 2008 Operating activities
Net Income 3.2
Depreciation and amortization 1.4
Cash effect of changes in
Accounts receivable -2.1
Accounts payable 1.1
Inventory -0.8
Cash from operating activities 2.8
Investment activities
Capital expenditures -2.2
Acquisitions and other investing activity -0.4
Cash from investing activities -2.6
Financing activities
Dividends paid -1.5
Sale or purchase of stock 2.1
Increase in short-term borrowing 1.4
Increase in long-term borrowing 3.2
Cash from financing activities 5.2
Change in Cash and Cash Equivalents 5.4
Consider the above statement of cash flows. In 2008, AOS Industries had contemplated buying a new warehouse for $3 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of the 2008?
A)It would have $3,000,000 less cash at the end of 2008.
B)It would have $2,925,000 less cash at the end of 2008.
C)It would have $1,500,000 less cash at the end of 2008.
D)It would have an additional $7,500,000 in cash at the end of 2008.

Question

Quizplus · Accepted Answer

Buying the new warehouse would result in a cash outflow of $3 million for AOS Industries. However, since the cost of the warehouse would be depreciated over 10 years, the annual depreciation expense would be $300,000 ($3 million divided by 10). This would result in a tax deduction of $75,000 ($300,000 multiplied by 25%) each year. This tax deduction would reduce the amount of income tax payable by AOS Industries, resulting in an increase in cash flow. Therefore, the impact on the amount of cash held by AOS at the end of 2008 would be a decrease of $2,925,000 ($3 million minus $75,000).

AOS Industries Statement of Cash Flows for 2008 Operating Activities