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

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Question: What is the effect of a depreciation expense on the financial statements?

Options:

Correct Answer: Decreases net income

Solution:

Depreciation expense reduces net income as it is an expense that is deducted from revenues.

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

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

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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