Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

8. Long Lived Assets

Depreciation: Summary of Main Methods

Financial Accounting

8. Long Lived Assets

Depreciation: Summary of Main Methods

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Multiple Choice

The depreciation tax shield is best defined as the:

increase in net income due to the use of accelerated depreciation methods

total amount of depreciation expense recorded on the income statement

reduction in taxable income resulting from allowable depreciation expenses, calculated as depreciation expense multiplied by the tax rate

difference between book value and market value of an asset at year-end

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Verified step by step guidance

Understand the concept of a depreciation tax shield: It refers to the reduction in taxable income due to allowable depreciation expenses. Depreciation is a non-cash expense that reduces taxable income, thereby lowering the tax liability.

Identify the formula for calculating the depreciation tax shield: The formula is given as \( \text{Depreciation Tax Shield} = \text{Depreciation Expense} \times \text{Tax Rate} \). This formula highlights how depreciation interacts with the tax rate to reduce taxes owed.

Recognize the role of depreciation in financial accounting: Depreciation allocates the cost of a tangible asset over its useful life. While it does not involve cash outflow, it impacts the income statement by reducing taxable income.

Apply the formula conceptually: To calculate the depreciation tax shield, multiply the depreciation expense (as recorded on the income statement) by the applicable tax rate. This gives the amount by which taxes are reduced due to depreciation.

Understand the implications: The depreciation tax shield is beneficial for businesses as it lowers their tax liability, effectively increasing cash flow. It is a key consideration in capital budgeting and financial decision-making.