What is the effect of using different depreciation methods on financial statements?
Practice Questions
1 question
Q1
What is the effect of using different depreciation methods on financial statements?
No effect on net income
Different net income and asset values
Only affects cash flow
Only affects tax liabilities
Different depreciation methods can lead to different net income and asset values on financial statements.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of using different depreciation methods on financial statements?
Solution: Different depreciation methods can lead to different net income and asset values on financial statements.
Steps: 6
Step 1: Understand what depreciation is. Depreciation is the process of allocating the cost of a tangible asset over its useful life.
Step 2: Learn about different depreciation methods. Common methods include straight-line, declining balance, and units of production.
Step 3: Know how each method affects expenses. Straight-line spreads the cost evenly, while declining balance results in higher expenses in the early years.
Step 4: Realize that higher expenses lower net income. If you use a method that results in higher depreciation expenses, your net income will be lower.
Step 5: Understand asset values on the balance sheet. Different methods will show different book values for the asset over time.
Step 6: Recognize the impact on financial statements. Different depreciation methods can lead to variations in net income and asset values, affecting how investors and stakeholders view the company.
