Elmbrook Corporation reported net income of $58,000. Depreciation expense for the year was $132,000. The company calculates depreciation expense using the straightline method, with a useful life of 10 years. Top management would like to switch to a 15-year useful life because depreciation expense would be reduced to $88,000. The CEO says, “Increasing the useful life would increase net income and net cash provided by operating activities.”
Instructions
Provide a comparative analysis showing net income and net cash provided by operating activities (ignoring other accrual adjustments) using a 10-year and a 15-year useful life. (Ignore income taxes.) Evaluate the CEO’s suggestion.