Module I· Three-Statement Mechanics & LinkagesIntermediate
Question
Depreciation rises by 10 — what happens across the three statements? (30% tax rate)
Answer
Mechanics
Classic question — D&A rises by 10 at a 30% tax rate works out as follows:
Income statement
| Item | Δ |
|---|---|
| D&A | +10 |
| EBIT | −10 |
| Taxes (30% × 10) | −3 |
| Net income | −7 |
Cash flow
| Item | Δ |
|---|---|
| Net income | −7 |
| + D&A (non-cash) | +10 |
| = OCF | +3 |
Balance sheet
| Account | Δ |
|---|---|
| PP&E (accumulated) | −10 |
| Cash | +3 |
| Retained earnings | −7 |
Sanity check
The change in assets (−10 + 3 = −7) equals the change in equity (retained earnings −7) — the balance sheet balances.
Deep diveShow more details
Key point
Higher D&A creates cash via the tax shield — which is why capex-intensive sectors (telco, utilities) are less 'tax-efficient' at low tax rates, and vice versa. This is exactly why LBO sponsors value D&A.