Evergreen Mfg. is a rapidly growing company that acquires more equipment every year. Evergreen uses straight-line depreciation in its financial statements and MACRS in its tax returns. Identify all correct statements:
A) Using straight-line depreciation in the financial statements instead of an accelerated method increases Evergreen's reported net income.
B) Using straight-line depreciation in the financial statements instead of an accelerated method increases Evergreen's annual net cash flow.
C) Using an accelerated method instead of straight-line in income tax returns increases Evergreen's net cash flow.
D) As long as Evergreen keeps growing, it will report more depreciation in its income tax returns each year than it does in its financial statements.

Question

Quizplus · Accepted Answer

Using an accelerated method in income tax returns results in higher tax deductions, which, in turn, increases net cash flow. The other statements are incorrect. A decreasing net income would result from using an accelerated method, not increasing it, and the straight-line depreciation method reduces annual net cash flow over time as the asset's value decreases. Since Evergreen uses both straight-line depreciation and MACRS, the depreciation recorded on the financial statements and tax returns will eventually equalize. Therefore, statement D is incorrect.