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What is the effect of depreciation on financial statements?
Practice Questions
Q1
What is the effect of depreciation on financial statements?
Increases net income
Decreases net income
Has no effect on cash flow
Increases asset value
Questions & Step-by-Step Solutions
What is the effect of depreciation on financial statements?
Steps
Concepts
Step 1: Understand what depreciation is. Depreciation is the process of allocating the cost of a tangible asset over its useful life.
Step 2: Recognize that depreciation is considered an expense on the income statement.
Step 3: Know that when depreciation is recorded, it reduces the total expenses for the period.
Step 4: Understand that higher expenses lead to lower net income (profit).
Step 5: Realize that lower net income affects the overall financial performance of a company.
Step 6: Remember that depreciation also affects the balance sheet by reducing the value of the asset over time.
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