Chapter 9 discussion - Effects of depreciation on income...

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Effects of depreciation on income and cash flows In its financial statements, Fly safe Airlines has for many years depreciated its aircraft over an estimated useful life of 12 years. In preparing this year's financial statements, management decided to revise the estimate from 12 years to 15. Briefly explain how this revision in estimated life is likely to affect this year's: (a) Net income. (b) Net cash flow. (c) Taxable income. Regardless of which method is used, the depreciation for the current year onwards will decrease, which means increase in Net Income. I agree with Tracy, based on the information in the question if no changes are made in the length of the useful life of the asset or the method used when preparing a federal income tax, there is no change in the taxable income. As for the cash flow there is no change in the current period. Depreciation is a methodical allocation of the cost of an asset (planes in this case) to the expense account over the years of its useful life (15 in this situation), and thus it is a non-cash charge to the income & has no effect on the cash flow. The only time there is a change in cash flow in relation to the tangible assets, is when either there is a new purchase or a sale. --------------------------------------------------------------------------------------------------------------------------------------------------- ---------- Let's also look at the decrease of an estimated useful life. Machinery acquired new on January 1 at a cost of $10,000 was estimated to have a useful life of 10 years and a salvage
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Chapter 9 discussion - Effects of depreciation on income...

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