There’s a problem in fra regarding earnings quality where a firm has increased the expected useful life of ppe. The book says that while this will increase operating income through decreased dep expense, this has no OCF impact as dep is a noncash charge. However, wouldnt reducing dep expense reduce OCF by reduced dep*tax rate? You’ve expose taxable income to an amount equal to dep reduction.
Which problem are you referencing?
Reading 22 EOC question 4. I got the question right but I assumed that reducing dep would exacerbate the divergence bt ebit and cf on both ends but the explanation indicates that it would only impact the relationship on the ebit side.
This is most likely because actual cash payments of taxes are determined by preset MACRS depreciation tables, so when you adjust PPE depreciation for GAAP accounting it doesn’t affect the actual cash taxes paid, just the reported taxes and deferred taxes liability/asset accounts. Can anyone confirm this? Pretty sure I’m right here
I agree, see also http://www.accountingcoach.com/blog/book-depreciation-tax-depreciation , The tax depreciation will be determined by the Internal Revenue Service’s rules.