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What is the effect of depreciation on financial statements?
What is the effect of depreciation on financial statements?
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Practice Questions
1 question
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
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Depreciation decreases net income as it is an expense that reduces profit.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of depreciation on financial statements?
Solution:
Depreciation decreases net income as it is an expense that reduces profit.
Steps: 6
Show Steps
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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