If depreciation increases by $20, walk through the impact on all three financial statements. Assume a 25% tax rate.

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IBPrep · Accepted Answer

Income statement: EBIT falls by $20. At a 25% tax rate, taxes drop by $5, so net income falls by $15.

Cash flow statement: net income is down $15, but the $20 of depreciation is non-cash and gets added back, so operating cash flow is up $5. With no other changes, the net change in cash is $5.

Balance sheet: cash rises by $5, net PP&E falls by $20, so assets are down $15. Retained earnings fall by $15. Assets ($15) equal the change in equity ($15), so it balances.

If depreciation increases by $20, walk through the impact on all three financial statements. Assume a 25% tax rate.

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