Suppose a Corporation Can Change Its Depreciation Method So That

question 43

Multiple Choice

Suppose a corporation can change its depreciation method so that its tax payments will decrease by $5,000 this year but increase by $5,000 next year.

• A) The change will have no impact on the value of the company because its cash flow over time will be the same.
• B) The change will decrease the value of the company because investors don't like changes in accounting methods.
• C) The change will decrease the value of the company because lower tax payments this year result from lower reported income.
• D) The change will increase the value of the company because the value of the cash savings this year exceeds the cost of the cash payments next year.

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Definitions:

Income Summary

An account used in the closing process during the accounting cycle that summarizes revenues and expenses before transferring the net income or loss to retained earnings.

Owner's Capital

The total value of assets contributed by the owner(s) to a business minus any withdrawals made by the owner(s).

Correcting Entry

An accounting entry made to correct errors found in the financial statements after they have been prepared.

Incorrect Entry

An error or mistake made in recording transactions in the accounting records.