Assume That Congress Recently Passed a Provision That Will Enable

question 94

Multiple Choice

Assume that Congress recently passed a provision that will enable Bev's Beverages Inc.(BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate.Prior to the new provision,BBI's net income was forecasted to be $4 million.Which of the following best describes the impact of the new provision on BBI's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

• A) The provision will reduce the company's cash flow.
• B) The provision will increase the company's tax payments.
• C) The provision will increase the firm's operating income (EBIT).
• D) The provision will increase the company's net income.
• E) Net fixed assets on the balance sheet will decrease.

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Definitions:

Marginal Revenue

The increased earnings from the sale of one more unit of a product or service.

Total Revenue

The overall financial gain a business obtains from the sale of goods or delivery of services within a specific timeframe.

Competitive Price-searcher

A market situation where firms have some control over their prices because their products are differentiated, leading them to search for competitive pricing strategies.

Marginal Cost

The cost incurred by producing one additional unit of a product.