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What is the effect of depreciation on the financial statements of a company?

Practice Questions

Q1
What is the effect of depreciation on the financial statements of a company?
  1. Increases net income
  2. Decreases net income
  3. Has no effect on cash flow
  4. Increases total assets

Questions & Step-by-Step Solutions

What is the effect of depreciation on the financial statements of a company?
  • Step 1: Understand what depreciation is. It is the process of allocating the cost of a tangible asset over its useful life.
  • Step 2: Know that depreciation is recorded as an expense on the income statement.
  • Step 3: Realize that when depreciation is recorded, it reduces the company's net income.
  • Step 4: Understand that lower net income means lower overall profit for the company.
  • Step 5: Remember that this reduction in profit can affect other financial metrics and ratios.
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