CFA Practice Question
If the estimated life of a long-term asset is increased, which of the following is true?
II. Taxes decrease.
III. Income increases.
IV. Cashflow decreases.
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 |