CFA Practice Question

CFA Practice Question

Which of the following is (are) FALSE?

I. Depreciation does not affect cash flows since it is a non-cash expense.
II. Depreciation does not affect the cash flow statement since it is an allocation of past investing expense.
III. Under U.S. GAAP, companies can use different methods of depreciation for financial reporting and tax purposes.
A. I and III.
B. II and III.
C. I and II.
Explanation: Depreciation does affect cash flows since it reduces the amount of income tax paid. Further, U.S. firms have the latitude of choosing an accelerated method of depreciation for tax purposes and a different method (like straight-line method) for financial reporting. This flexibility has an important effect on the reported balance sheet, which has to recognize an explicit liability in the form of deferred taxes payable.

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