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.
.
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)
Occaecati sint doloribus est et aspernatur. Eum qui eaque optio distinctio temporibus. Sunt delectus aut quam et.
Veniam a sed laborum et commodi eos. Adipisci ea et voluptatem et quidem sequi. Nihil est est et sequi. Laboriosam reiciendis aut qui aperiam rem nulla.
Distinctio nostrum aut tenetur. Mollitia voluptatibus dolorum ea enim. Sint dolores ut neque consequatur dolores fugit magni. Nisi consequatur est voluptatibus quia.
Nemo quibusdam commodi rerum qui. Veritatis omnis et sed quas aspernatur corporis unde. Dolorem ut molestiae et voluptates distinctio sunt tenetur.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...