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What is the effect of a depreciation expense on the financial statements?
What is the effect of a depreciation expense on the financial statements?
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Practice Questions
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Q1
What is the effect of a depreciation expense on the financial statements?
Increases net income
Decreases net income
Increases cash flow
No effect on net income
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Depreciation expense reduces net income as it is an expense that is deducted from revenues.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of a depreciation expense on the financial statements?
Solution:
Depreciation expense reduces net income as it is an expense that is deducted from revenues.
Steps: 5
Show Steps
Step 1: Understand what depreciation expense is. It is the reduction in value of a long-term asset over time.
Step 2: Know that depreciation expense is recorded on the income statement as an expense.
Step 3: Realize that when depreciation expense is recorded, it reduces the total revenue.
Step 4: Understand that a lower revenue leads to a lower net income (profit) on the income statement.
Step 5: Remember that net income is also reported on the cash flow statement, affecting cash flow from operations.
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