Accounting & the 3 Statements
Walk me through how a $10 increase in depreciation flows through the three statements (40% tax).
Model answer
Income statement: pretax income falls $10, so net income falls $6. Cash flow statement: start with net income -$6, add back the $10 non-cash depreciation, so cash rises $4. Balance sheet: cash up $4, PP&E down $10 (net assets -$6); on the other side retained earnings down $6. It balances. Net effect: you saved $4 in cash via the tax shield.
This is one of the 20 free cards. Sign up free for 10 reps a day from the full 1,500+ bank.
More from Accounting & the 3 Statements
- What are the three financial statements and what does each show?
- How are the three statements linked?
- A company buys $100 of inventory on credit (no cash yet). Walk through the three statements.
- Why can a profitable company still run out of cash?
- What's the difference between cash-based and accrual accounting?
- If you could use only one statement to evaluate a company, which would you pick and why?