If Depreciation increases by 10 and the tax rate is 40%, what is the impact on Net Income?

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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

If Depreciation increases by 10 and the tax rate is 40%, what is the impact on Net Income?

Explanation:
Depreciation acts as an expense that lowers pretax income. If depreciation increases by 10, pretax income falls by 10. Taxes drop by 40% of that amount, so tax expense decreases by 4. Net income changes by the drop in pretax income minus the tax savings: -10 + 4 = -6. So net income decreases by 6. This reflects the after‑tax cost of the depreciation, which is 60% of the depreciation amount.

Depreciation acts as an expense that lowers pretax income. If depreciation increases by 10, pretax income falls by 10. Taxes drop by 40% of that amount, so tax expense decreases by 4. Net income changes by the drop in pretax income minus the tax savings: -10 + 4 = -6. So net income decreases by 6. This reflects the after‑tax cost of the depreciation, which is 60% of the depreciation amount.

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