[law0915]

Hi All,

I had this interview question that is so basic and simple and now that I think about it, I wanted to make sure I’m thinking about this correctly. Are they saying if we did an entry to reduce D/E, how would it affect the F/S?

How would a $10 decrease in depreciation affect the financial statements?

My answer:

$10 decrease in depr. Expense on the Income statement

$10 decrease in acc depr. on the Balance sheet

**And I forgot about this**

$10 decrease/reduce cash flow in Stmt of cash flows, because you no longer get to add back the $10 depr expense.

REG 77 Feb14
BEC 13*, 79 Aug14
FAR 64**, 76 Nov14
AUD 89 Feb15

*Exited exam after first testlet
**Only studied F1-F6 out of 10 Becker chapters

Licensed Arizona CPA

[EuroAddict]

You should be fine. Could have added how tax rate would come into play.

Did they want if it went from 90-100 or 100-90? Either way you're fine.

-----------------------------
BEC - 77, 03/2015 (first try)
FAR - 79, 05/2015 (second try)
REG - 83, 12/2015 (first try)
AUD - 84, 03/2015 (first try)

I got 99 problems but the CPA ain't one.

[WaivingMyHands_ALOT]

Don't think it would change cash flow. The only reason you add back depreciation expense on statement of cash flow is because you start with net income, which includes the non cash expense. It's true you wouldn't have the addback, but you'd also have less non cash expense included in net income (your starting point). So you'd have less addback but higher starting point. Would end up getting you to the same place.

It would however impact retained earnings (more net income since less depreciation expense, which is ultimately closed to RE.

Would also effect tax expense (less deduction so greater tax liability, assuming book follows tax), which would partially offset the reduced depreciation expense. So if you're looking for the net effect you'd have to tax effect the reduction in depreciation.

AUD 99
BEC 96
FAR 94
REG 96

[law0915]

Thanks for the responses. I'll keep the tax in mind as we won't get the tax benefit from the expense. That makes sense about the SCF. I didn't think about the statement of R/E or Equity.

REG 77 Feb14
BEC 13*, 79 Aug14
FAR 64**, 76 Nov14
AUD 89 Feb15

*Exited exam after first testlet
**Only studied F1-F6 out of 10 Becker chapters

Licensed Arizona CPA

[sdguy]

Actually it doesn't affect retained earnings, it effects Net income on the equity portion of the balance sheet. Net income doesn't roll into retained earnings until the year-end close.

AUD: 83
FAR: 77
REG: 86
BEC: 86

[mw798]

“$10 decrease/reduce cash flow in Stmt of cash flows, because you no longer get to add back the $10 depr expense.”

Actually, it has no impact on the statement of cash flows. Depreciation is a non-cash activity.

The add back only relates to the indirect cash flow statement and is only an adjustment because you are stepping from net income and is just a reconciling item only. In the direct method you won't see depreciation at all. But it's not an increase or decrease to cash ever.

[mw798]

“Actually it doesn't affect retained earnings, it effects Net income on the equity portion of the balance sheet. Net income doesn't roll into retained earnings until the year-end close.”

Net income is closed to retained earnings on a monthly basis actually for a lot of companies today for management reporting purposes.

[Alex]

I would be inclined to say that $10 is immaterial and wouldn't affect anything. But that's just me…

AUD - 78
BEC - 79
FAR - 75
REG - 76

Ninja 10 Point Combo

REG-74, 76
AUD-09/08/16
FAR-TBD
BEC-TBD

[Author]

Replies