Question

and unilely J U Drplalll. O "Accelerated depreciation saves cas vs lower net income.” Explain. in the optimotodur.

Answer 1

Answer

• Accelerated Depreciation means charging MORE or EXCESS depreciation to the Income Statement to write off the asset quickly.
• Accelerated Depreciation saves cash but shows lower net income.
  This is because:
  >Depreciation expense is an ‘expense’ item.
  >Charging too much depreciation expense (as done in accelerated depreciation) will lead to HIGHER depreciation expense on the Income Statement.
  >This would lead to higher expenses and hence a LOWER Net Income before taxes.
  >Lower net income before taxes = Lower income taxes to be paid. In this way, it saves CASH.
  >On the other hand, higher depreciation will overstate the expense portion on the Income Statement.
  >Higher expenses will lead to LOWER NET INCOME.