Question

The following condensed income statement and reconciliation schedule are from the annual report of Tran Company ($ in millions):
Sales .......................... $425
Expenses ........................ 350
Net income ........................ $ 75
Reconciliation Schedule of Net Income to
Net Cash Provided by Operating Activities
Net income ...................... $ 75
Add noncash expenses: Depreciation ........... 25
Deduct net increase in noncash operating working capital ... (17)
Net cash provided by operating activities ........... $ 83
A shareholder has suggested that the company switch from straight-line to accelerated depreciation on its annual report to shareholders, maintaining that this will increase the cash flow provided by operating activities. According to the stockholder’s calculations, using accelerated methods would increase depreciation to $48 million, an increase of $23 million; net cash flow from operating activities would then be $106 million.
1. Suppose Tran Company adopts the accelerated depreciation method proposed. Compute net income and net cash flow from operating activities. Ignore income taxes.
2. Use your answer to requirement 1 to prepare a response to the shareholder.



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  • CreatedFebruary 20, 2015
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