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What is the effect of using the Straight-Line Method on financial statements?

Practice Questions

Q1
What is the effect of using the Straight-Line Method on financial statements?
  1. Higher initial expenses
  2. Lower net income in early years
  3. Consistent expense recognition
  4. Variable expense recognition

Questions & Step-by-Step Solutions

What is the effect of using the Straight-Line Method on financial statements?
  • Step 1: Understand the Straight-Line Method. This is a way to spread the cost of an asset evenly over its useful life.
  • Step 2: Recognize that each year, the same amount of expense is recorded on the financial statements.
  • Step 3: Note that this consistent expense recognition helps in predicting future profits.
  • Step 4: Realize that stable expenses lead to stable net income, making financial statements easier to understand.
  • Step 5: Conclude that using the Straight-Line Method provides clarity and consistency in financial reporting.
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