If depreciation increases, what are all the effects on financial statements?

CFA Level I FRA
#1

If depreciation increases, they will be a decrease in asset value

Also, there will be a decrease in net income

No effect on cash flows as depreciation is a non-cash item

What other effects are important?

#2

Effect on deferred tax liability

#3

That’s if depreciation for tax purposes is greater than depreciation for financial purposes.

If depreciation for taxes increases, then after-tax cash flow will increase (because taxes will be lower).

#4

If depreciation increases for financial purposes, then:

  • Total assets will be lower
  • Net income will be lower
  • Retained earnings will be lower
  • Debt-to-total-assets and debt-to-equity will be higher
  • ROA will (probably) be lower and ROE will (probably) be lower
#5

If depreciation increases It will reduce the Net Income . and thus the capital in the balancesheet . On the asset side It will reduce the asset portion so that they are in a position to balance . It will affect the ratios also .

  1. Net profit ratio will decrease

  2. Asset turnover ratio will increase

  3. Reserves will be lower

  4. Leverage ratio like Debt to equity will be higher