If Accrued Expenses increases by 10, what is the impact on Net Income (with a 40% tax rate)?

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Enhance your accounting skills for the PSIA Accounting Exam. Use flashcards and multiple-choice questions to prepare effectively with hints and explanations. Get set for your exam success!

Multiple Choice

If Accrued Expenses increases by 10, what is the impact on Net Income (with a 40% tax rate)?

Explanation:
Rising accrued expenses increase the expense recognized in the period, which lowers pretax income by the same amount. If accrued expenses go up by 10, pretax income decreases by 10. With a 40% tax rate, the tax expense declines by 4 (0.40 × 10), providing a tax savings of 4. Net income is the after-tax result, so the incremental change is a decrease of 10 in pretax income minus the 4 tax savings, equaling a net decrease of 6.

Rising accrued expenses increase the expense recognized in the period, which lowers pretax income by the same amount. If accrued expenses go up by 10, pretax income decreases by 10. With a 40% tax rate, the tax expense declines by 4 (0.40 × 10), providing a tax savings of 4. Net income is the after-tax result, so the incremental change is a decrease of 10 in pretax income minus the 4 tax savings, equaling a net decrease of 6.

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