Question

Assume that Congress recently passed a provision that will enable Barton's Rare Books (BRB) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate. Prior to the new provision, BRB's net income after taxes was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BRB's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.- The provision will reduce the company's net cash flow.- The provision will increase the company's net income.- Net fixed assets on the balance sheet will increase.- The provision will increase the company's tax payments.-Net fixed assets on the balance sheet will decrease.

Answer 1

Answer:

Net fixed assets on the balance sheet will decrease.

Explanation:

If we assume that Congress recently passed a provision that will enable Barton's Rare Books (BRB) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate.

The conclusion that best describes the impact of the new provision on BRB's financial statements versus the statements without the provision is that the Net fixed assets on the balance sheet will decrease.

Normally in the Balance Sheet, the values of Net Assets are arrived at by subtracting the accumulated amounts of depreciation from the cost of the assets

Therefore if the values of depreciation are doubled, then the resultant amount of Net Assets will be smaller because a bigger deduction has been made against the cost of acquisition.