If a company changes the useful life of an asset from 20 to 10 years...how does that effect the three statements?
How would changing accounts payable days affect working capital?
Anyone know how to answer these? Thanks!
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changing useful life would affect the amount allocated for depreciation. so it would double the depreciation expense (given straight line method). so income state - depreciation expense balance sheet - accumulated depreciation cash flow - would increase
extending or shortening A/P days would increase or decrease (respectively) because its cash your holding on to instead of paying it out. cash is part of working capital.
i think im right, but its been a while since i've been in introductory accy classes.
How would cash flow increase?
D&A is netted out of cash flow because it is a non-cash expense. It is the first thing to be added back to Net Income on the cash flow statement via the indirect method.
If anything, I think you could make an argument that cash flow would decrease, because lowering the useful life of an asset speaks to replacing it sooner, which leads to an increase in maintenance CapEx.
if a/d increases, that directly affects the bottom line FCF calculation. you add back more a/d
right - you add D&A back to a lower net income.
Actually, the depreciation tax shield (from a GAAP basis) is reduced, so taxes would increase, and FCF would decrease...
well im assuming that by increasing your depreciation expense it would lower your taxable income, if the company makes a profit. change in the useful life of an asset does not mean it would necessarily be replaced at that moment, it is just an way of allocating depreciation. And cash flow is not affected by useful life because it is not affecting the current period.
at least that is the way i see it.
reducing the useful life of the asset is the same question as increasing depreciation expense. increasing accounts payable days reduces net working capital which increases cash.
You guys are really not giving a complete answer for the first question. Assume you go 20 to 10 years, straight line, no retro change...let's say from 50 to 100 Income Statement: Depreciation expense increase by 100, this decreases your taxable income by 100, lowering your tax obligation (let's say its 30% tax rate) so now your taxed 30 less; ending net income is 70 lower than before C/F: Operating cash flow starts with a lower net income, but adds back the higher depreciation INCREASING OCF Balance Sheet: Your amort account goes up, leading to a lower value for capital assets by 100, your cash goes up 30, your retained earnings goes up by the net income, but it is lower now 70 to be exact lower, balancing the offsetting asset adjustments
Using numbers lets say dep goes up 100, taxable income g
If your looking all the way at FCF you might want to mention that depreciation on the I/S isn't necessarily the one you can use for cash taxes owed calculation. Even though most common practice is likely to assume they are the same.
Going back to the OP question, he never mentioned FCF so I don't see the need to discuss that, but if you must EBIT would be lower, as D&A is higher now, taxes owed is then lower, but after you add back the D&A your going to get a higher FCF.
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