Accounting Online Program Certification Practice Test

If the depreciation for cars was recalculated from 25% to 20%, what impact does this have on Smyths's profits?

1. Increase profit

2. Decrease profit

3. No impact

4. Not determinable

The correct answer is: Decrease profit

When the depreciation rate for cars is recalculated from 25% to 20%, this leads to a lower expense related to depreciation on Smyths's profit and loss statement. Depreciation is a non-cash expense that reduces the reported profit of a company. By decreasing the depreciation rate, Smyths will recognize a lower depreciation expense in each accounting period. This decrease in expenses means that the company's profits effectively increase since fewer earnings are being deducted to account for the wear and tear of the vehicles. Therefore, the impact of recalculating the depreciation from a higher rate to a lower one results in an increase in profits. In this situation, the correct answer is that profits are expected to increase, as the expense recognized for depreciation is now lower. This relationship between depreciation rates and profit illustrates how adjustments in non-cash expenses can significantly affect a company's net profit figures.