I have a question on impact to financial statements when PP&E is bought and say has a useful life of 10 years and taxes are 40%.
At time of purchase:
Balance Sheet: PP&E increases by say $100, cash decreases or Acc. Payable increases by same amount
Cash Flow: cash flows deceases by amount if paid with cash
During year
Income Statement: Dep. expense increases by 10, so NI decreases by 6 (100*(1-40%) due to increased depreciation;
Balance Sheet:
Asset - Net PP&E decreases by 10
Share holders equity – Retained earnings decreases because by 6 due to less NI
My question is what's the offsetting entry to make balance sheet equal? Taxes payable? Also, is there any impact on SCF during the year.
Thanks.
i'm pretty sure in the accounting statements depreciation is fully subtracted from NI. So Dep expense increases by 10, net PPE decreases by 10 and it balances. The tax shield is used when computing free cash flows.
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