Wk 3 Essay discussions 5-55

Wk 3 Essay discussions 5-55 - a business or a project the...

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Tara Anderson 5-55 Wong’s professor could have been meant that the depreciation reduces taxable income which will reduce the income tax paid. What happens there is you add the depreciation expense back and this allows you to take a capital cost allowance to calculate taxable income. As for Berrett’s professor he is talking about the correct method of cash flows and how depreciation is a factor in the income statement. Depreciation is a source of funds not cash. When you are preparing the income statement you add the depreciation back into the net income. However, when income taxes are considered, the depreciation tax deduction lowers the income tax liability. Thus when analyzing the cash flow of
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Unformatted text preview: a business or a project, the depreciation tax deduction is a source of cash to the extent that it lowers the amount of income taxes paid. 1 I agree with Berrett’s professor because depreciation is not a source of cash it is the effect of your equipment (example) that you bought. The cash flow would be the price of the equipment that is reported but not the depreciation, as the accountant knows there is depreciation on the equipment but this is not where it needs to be reported. 1 Intermediate Accounting, Stice, Stice, Skousen 16e Chapter 5, pg 231...
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