Hi everyone, I’m working on Q # 2 and have a question Since the accelerated depreciation increases expenses for the yr, it thus reduces n/i and does not change revenue, wouldn’t A also be correct? Since n/i goes down and revenue doesn’t change, wouldn’t NMP decrease as a consequence? I also agree with © which is the correct answer but both can be accurate if you ask me. The question says which is most likely to occur, they both are likely to occur so how does one choose between two equally right answers?
I have the same question as well… Besides, since accelerated depreciation will reduce the carrying amount of assets won’t total asset turnover also increase making the (b) right???
can you post the full question? We did not have this chapter last year… and I can try to help.
There is definitely an issue with the question. Wait for errata to become available
I think C is more correct. Because switching to an accelerated depreciation method would increase depreciation expense and decrease income before taxes. Consequently, not as much taxes will be paid out as a result of decreased EBT. Hence, net income may decrease but may not by a big amount. In contrast, because tax shield effect of paying less taxes, the cash flow from operating activities would increase because of the resulting tax saving.
What about the answer (b)? Couldn’t be also right?
B cannot be correct because total asset turnover is equal to total revenue divided by average total assets therefore the assets would decrease at a fast pace with acc depreciation method and tat would thereby decrease and not increase (the denominator would increase whereas numerator would not change)
denominator would decrease - not increase as you have said. so TAT will go up with accelerated depreciation…
This one threw me too. I checked the CFAI website and there is erratta on it. The answer is still 'c but once you make the correction for the other two answer choices it makes sense.