Fleck Company began business with cash and common stockholders’ equity of $150,000. The same day, December 31, 20X1, the company acquired equipment for $60,000 cash. The equipment had an expected useful life of 5 years and an expected residual value of $5,000. The first year’s operations generated cash sales of $190,000 and cash operating expenses of $100,000.

1. Prepare an analysis of income and cash flow for the year 20X2, using the format illustrated in Exhibit. Assume (a) straight-line depreciation, and (b) DDB depreciation. Assume an income tax rate of 40%. Fleck pays income taxes in cash. The company uses the same depreciation method for reporting to shareholders and to income tax authorities.

2. Examine your answer to requirement 1. Does depreciation provide cash? Explain as precisely as possible.

3. Suppose Fleck doubled its 20X2 depreciation under straight-line and DDB methods. How would this affect the before-tax cash flow? Be specific.