How does depreciation affect cash balance?

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Study for the PSIA Accounting Test. Prepare with flashcards and multiple choice questions, each offering hints and explanations. Get ready for your exam challenges!

Multiple Choice

How does depreciation affect cash balance?

Explanation:
Depreciation is a non-cash expense that reduces taxable income, which lowers taxes owed. That tax shield lowers cash outflows for taxes, so the cash balance increases by the amount of depreciation multiplied by the marginal tax rate. In short, depreciation doesn’t put cash in directly, but it reduces tax payments, leading to higher cash as a result of the tax savings.

Depreciation is a non-cash expense that reduces taxable income, which lowers taxes owed. That tax shield lowers cash outflows for taxes, so the cash balance increases by the amount of depreciation multiplied by the marginal tax rate. In short, depreciation doesn’t put cash in directly, but it reduces tax payments, leading to higher cash as a result of the tax savings.

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