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What is the effect of depreciation on the financial statements?
What is the effect of depreciation on the financial statements?
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Practice Questions
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Q1
What is the effect of depreciation on the financial statements?
Increases net income
Decreases net income
No effect on net income
Increases cash flow
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Depreciation is an expense that reduces net income on the income statement.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of depreciation on the financial statements?
Solution:
Depreciation is an expense that reduces net income on the income statement.
Steps: 5
Show Steps
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 total expenses for the period.
Step 4: Understand that lower expenses lead to higher net income, but since depreciation is an expense, it actually reduces net income.
Step 5: Recognize that a lower net income affects the overall profitability of the company as shown on the income statement.
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