11 Assuming both are allowed by the tax laws, is it better to depreciate a capit
ID: 1095338 • Letter: 1
Question
11
Assuming both are allowed by the tax laws, is it better to depreciate a capital investment over 2 years or 3 ? Assume straight line depreciation for both so in the first case the depreciation is 50% and 50% and in the second it is 33%, 33% and 33%.
Construct the managerial balance sheet from the following information
Cash = $20 million
Accounts payable = $4 million
Short and long term liability = $81 million
Inventory = $15 million
Intangible assets = $0 million
Accounts receiveable = $3 million
Tangible assets = $80 million
Make sure you identify capital employed and working capital required.
12 What is the owners equity that you arrive at ?
13 What is the working capital requirement ?
14 When correcting an Income Statement to get to produce a cash flow statement you often need to add back depreciation ?
True False
Explanation / Answer
11. It is better to depreciate over 2 years because it is generally preferred to write off the costs of an asset over a short period of time rather than over a long one. By spreading the costs over a shorter time, a business can increase its annual depreciation tax break.
Asset
Equity and Liability
Current Asset
Cash
20 million
Account Payable
4 million
Inventory
15 million
Total Current Liability
4 million
Account Receivables
3 million
Short and Long term Liability
81 million
Total Current asset
38 million
Total Liability
85 miilion
Fixed Asset
Owner's Equity
33 million
Tangible Assets
80 million
Intangible Assets
0 million
Total Assets
118 million
Total Equity and Liability
118 million
12. owner Equity = 33 million
13 Working capital = Current asset- current liabilities = 38-4= 34 million
14 True
Asset
Equity and Liability
Current Asset
Cash
20 million
Account Payable
4 million
Inventory
15 million
Total Current Liability
4 million
Account Receivables
3 million
Short and Long term Liability
81 million
Total Current asset
38 million
Total Liability
85 miilion
Fixed Asset
Owner's Equity
33 million
Tangible Assets
80 million
Intangible Assets
0 million
Total Assets
118 million
Total Equity and Liability
118 million
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