If a company uses accelerated depreciation rather than straight-line depreciation, how would net income be affected?

• A. Net income would be higher in the early periods and lower in the later periods
• B. Net income would be lower in the early periods and higher in the later periods
• C. Net income would be unchanged
• D. Net income would be higher in all periods

Answer: (B)

Depreciation timing drives whether earnings are squeezed or lifted over the asset’s life. Accelerated depreciation allocates more of the asset’s cost to the early years, creating a larger depreciation expense then. That bigger expense reduces earnings before tax, so net income is lower in those early periods (even after tax effects are considered, the income figure is still reduced relative to straight-line). In the later years, depreciation under accelerated methods is smaller than straight-line, so the expense is reduced and net income rises relative to what it would be under straight-line. Thus net income would be lower in the early periods and higher in the later periods.