The ₹10 lakh depreciation question
Three statements · 8 min · Fictional interview case
The situation
You join the finance team of a packaging manufacturer just before the year-end close. The controller revises this year’s depreciation upward by ₹10 lakh. The founder asks why her profit falls even though the company did not buy another machine.
Talk through the three reports in order. The interviewer will listen for how the tax saving travels from profit into cash and how the balance sheet still balances.
- Extra depreciation
- ₹10 lakh
- Tax assumption
- 25%; same deduction for tax and accounting
- Other changes
- No new equipment, debt or working-capital movements; tax is paid this period
Your task
What changes on the income statement, cash flow statement and balance sheet?
Reveal step-by-step solution
Income statement
Profit before tax falls ₹10 lakh. Tax falls ₹2.5 lakh. Net income falls ₹7.5 lakh.
Cash flow statement
Start with ₹7.5 lakh less net income and add back ₹10 lakh more noncash depreciation. Operating cash rises ₹2.5 lakh.
Balance sheet
Cash rises ₹2.5 lakh and net equipment falls ₹10 lakh, so total assets fall ₹7.5 lakh. Retained earnings fall ₹7.5 lakh. Liabilities stay the same.
Interviewer follow-up
What if the extra depreciation is deductible in the accounts but gives no current cash tax relief?
Compare your answer
Cash does not rise this period. Discuss whether there is a deferred tax effect before stating the final changes to net income and equity.