If Accrued Expenses increases by 10, what is the impact on Net Income (with a 40% tax rate)?

If Accrued Expenses increases by 10, what is the impact on Net Income (with a 40% tax rate)?

• A. Net Income increases by 6
• B. Net Income decreases by 6
• C. Net Income increases by 10
• D. Net Income decreases by 10

Answer: (B)

Rising accrued expenses increase the expense recognized in the period, which lowers pretax income by the same amount. If accrued expenses go up by 10, pretax income decreases by 10. With a 40% tax rate, the tax expense declines by 4 (0.40 × 10), providing a tax savings of 4. Net income is the after-tax result, so the incremental change is a decrease of 10 in pretax income minus the 4 tax savings, equaling a net decrease of 6.

Rising accrued expenses increase the expense recognized in the period, which lowers pretax income by the same amount. If accrued expenses go up by 10, pretax income decreases by 10. With a 40% tax rate, the tax expense declines by 4 (0.40 × 10), providing a tax savings of 4. Net income is the after-tax result, so the incremental change is a decrease of 10 in pretax income minus the 4 tax savings, equaling a net decrease of 6.