What is the impact of not properly accounting for depreciation on financial statements?
Practice Questions
1 question
Q1
What is the impact of not properly accounting for depreciation on financial statements?
Overstated assets and net income
Understated liabilities
Accurate representation of financial position
No impact on cash flow
Not properly accounting for depreciation can lead to overstated assets and net income, misrepresenting the financial position.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the impact of not properly accounting for depreciation on financial statements?
Solution: Not properly accounting for depreciation can lead to overstated assets and net income, misrepresenting the financial position.
Steps: 5
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 assets are recorded on the balance sheet. If depreciation is not accounted for, the value of these assets will be higher than they should be.
Step 3: Know that net income is reported on the income statement. If depreciation is not deducted, the net income will be higher than it actually is.
Step 4: Realize that overstated assets and net income can mislead investors and stakeholders about the company's financial health.
Step 5: Understand that this misrepresentation can lead to poor decision-making by investors, creditors, and management.
