Simple Accounting Questions, I just don't get
Hey Guys, just started with accounting basics and lets assume this following very easy task:
Depreciation of some random machine by 10 Dollar, what happens in the 3 financial statements assuming a tax rate of 40%
**Income Statement ** Net Income will go down by 6
**Balance Sheet ** - Machine down by 10 - Cash up by 4
What I dont understand is, why do we get 4 In Cash? Where do we get them? I know that we add the 10 in depreciation to the net income to get the cash flow from operativ activity, but still I do not get where this 4 Dollar in the end comes from? Is it a tax refund?
You save 4 dollars because depreciation decreases net income, which means you pay less taxes. Tax is a % of net income. If net income is lower, ur tax expense is also lower. For example, if your net income is $10, and tax rate is 40%, you pay 4 dollars in tax. However, if your net income decreases to $5, you pay 2 dollars in tax. Therefore, you save 2 dollars, so cash is up 2 dollars. (4 - 2 = 2)
Someone correct me if I am wrong.
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tax savings...
-net income down 6 like you said -add back d&a (non-cash expense) $10..-6+10= 4. Cash is UP $4 from tax savings because you are reducing your taxable income with that original $10 d&a charge. But, since it is a non-cash charge, it is added back when you are calculating cash flow.
then the rest balances out like you said. Cash UP 4, PP&E DOWN 10 ----- RE DOWN 6 (from net income)
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