Use the Information Below to Answer the Following Questions

question 17

Multiple Choice

Use the information below to answer the following questions:
Pottery Ltd is trying to decide whether to use straight-line or reducing balance depreciation for its assets for both accounting and tax purposes. If it used straight-line, the depreciation expense for the first year would be $750 000, but if it used reducing balance at the rate allowable for taxation purposes, the expense would be $1 125 000. The company’s income tax rate is 40%.
-What would be the effect on cash from operations if the reducing balance method were used rather than the straight-line method?

• A) There would be a $375 000 increase.
• B) There would be a $375 000 reduction.
• C) There would be a $225 000 reduction.
• D) There would be no effect on cash.

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Definitions:

Return on Equity

A measure of a corporation's profitability relative to stockholders' equity.

Net Income

Net Income is the total earnings of a company after all expenses and taxes have been deducted from revenue.

Shareholders' Equity

The residual interest in the assets of a corporation after deducting liabilities, often referred to as net assets or equity.

Cost of Capital

The necessary rate of gain a company must obtain from its investments to keep its market price constant and attract financial support.