What effect does a decrease in taxes owed by $4 have on net income?

What effect does a decrease in taxes owed by $4 have on net income?

• A. Net income increases by $4
• B. Net income remains the same
• C. Net income decreases by $4
• D. Net income decreases by $10

Answer: (A)

When taxes owed decrease by $4, it has a direct positive effect on net income. This is because net income is essentially calculated as revenue minus expenses, and taxes are considered an expense. A reduction in the amount owed in taxes means that a company retains more of its earnings, which directly increases net income. In this case, since the only change provided is a decrease of $4 in taxes owed, the net income will increase by that same amount. As a result, the overall financial position of the entity improves by $4, reflecting increased profitability after the reduction in tax liability. This principle underlines the importance of effective tax management in enhancing net income, as lower tax expenses allow more earnings to be available to shareholders or for reinvestment in the company.

When taxes owed decrease by $4, it has a direct positive effect on net income. This is because net income is essentially calculated as revenue minus expenses, and taxes are considered an expense. A reduction in the amount owed in taxes means that a company retains more of its earnings, which directly increases net income.

In this case, since the only change provided is a decrease of $4 in taxes owed, the net income will increase by that same amount. As a result, the overall financial position of the entity improves by $4, reflecting increased profitability after the reduction in tax liability. This principle underlines the importance of effective tax management in enhancing net income, as lower tax expenses allow more earnings to be available to shareholders or for reinvestment in the company.