CFA Practice Question

CFA Practice Question

If the estimated life of a long-term asset is increased, which of the following is true?

I. The depreciation expense increases.
II. Taxes decrease.
III. Income increases.
IV. Cashflow decreases.
A. I and III
B. III and IV
C. I and II
Explanation: The increase in the asset's life estimate decreases the depreciation expense. Hence, income increases, taxes increase, and cashflow decreases (due to higher taxes).

User Contributed Comments 7

User Comment
NeoWenNing It should be III only. Increasing tax expense doesn't meant that the actual amount of cashflow for tax increase. Depreciation method for tax reporting and financial reporting is different. There should be no cashflow effect.
rainbowsoda Here suppose the same method for both reporting and more depreciation means more CFO by indirect method.
eddeb Decrease in CFO will come from higher taxes.
Nightsurfer Good call eddeb!
Windknot Also, CFO would decrease because you're adding back less depreciation expense, correct?
chandsingh I thought accounting depreciation has no bearing on tax depreciation.I guess the tax rules make adjustment if the lofe of the assets increases?
siggarusfigs even if they used accelerated on the tax return an increase in useful life would increase the dx
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