Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

8. Long Lived Assets

Depreciation: Summary of Main Methods

Financial Accounting

8. Long Lived Assets

Depreciation: Summary of Main Methods

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Multiple Choice

Which of the following correctly describes the nature of depreciation?

Depreciation is the process of increasing the value of an asset over time.

Depreciation is the immediate expensing of an asset's cost in the year of purchase.

Depreciation is the recognition of cash inflows from the use of an asset.

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life.

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Verified step by step guidance

Understand the concept of depreciation: Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. It reflects the wear and tear, obsolescence, or reduction in value of the asset as it is used in operations.

Clarify the incorrect options: Depreciation does not increase the value of an asset over time; instead, it reduces the book value of the asset. It is also not an immediate expensing of the asset's cost in the year of purchase, as this would violate the matching principle in accounting. Lastly, depreciation is unrelated to cash inflows; it is a non-cash expense.

Identify the correct description: Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. This ensures that the expense is matched with the revenue generated by the asset during its usage.

Understand the purpose of depreciation: The goal is to spread the cost of the asset over the periods it benefits the business, adhering to the accrual basis of accounting. This provides a more accurate representation of financial performance.

Learn the methods of depreciation: Common methods include straight-line depreciation, declining balance method, and units of production method. Each method allocates the cost differently based on the nature of the asset and its usage.