Galvin corporation has been depreciating its machinery over 18 years. Management has recently determined that the actual life of the machineary is 12 years so A galvin tax increase B interest expense increase C earning per share increase D cash flow increase Schwser gives D from my perpective, I assume the company uses same depreciation methods for tax and income statement . Thus, the increase in depreciation can save cash tax. Can anybody provide other explanation?
I think you’ve got it. More depreciation expense -> less taxable income -> more cash flow.
Company need not use the same depreciation methods for Income statement and the tax statement. Usually the use of the different tax methods is what results in the creation of Deferred Tax liabilities. You want to, as a company pay lesser tax. So you use an accelerated deprn. method for tax purposes, so that your EBIT reduces, so lesser tax is paid. From a Income statement perspective, you would want to, show a higher income to your shareholders. Using “straight line deprn.” for example, allows you to show a higher NI to your shareholders. CP