Non-accounting major need help with technical question

monkeytomd's picture
Rank: Orangutan | banana points 315

Whatup chimps,

non-accounting/finance major here, I was going through some technicals and came across this question. It might seem really easy for most of you but I can't find the solution online: Tax depreciation is $2 million over 5 years, while financial statement depreciation for the asset is $1 million over 5 years. Walk me through the impact of these differences on the financial statements, assuming a tax rate of 40%.

I'd appreciate any help, and feel free to post your technical questions too.

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Comments (4)

Sep 30, 2018

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Nov 28, 2018

Correct me if I am misunderstanding, but I think the corporation is writing off $2m dollars off of its taxes (getting a $2m*0.4 tax benefit) and only writing off $1m off of its assets and adding back $1m into CFFO. Not sure if this is correct as I am only a student as well.

Nov 28, 2018

I fortunately haven't had to think about this stuff in depth in a while, so I could be forgetting stuff. But, you basically get extra cash from the tax shield ($1mm * tax rate). This is offset by a Deferrered tax liability on the balance sheet for the same amount. The financial depreciation of 1mm then flows through the statements as normal.

Dec 1, 2018
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