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 statements about depreciation is correct?

Depreciation has no impact on cash flow because it does not involve any actual cash outlay.

Depreciation increases cash flow by directly providing additional cash to the business.

Depreciation is only relevant for tax purposes and does not affect financial statements.

Although depreciation is a noncash deduction, it affects cash flow by reducing taxable income and thus taxes paid.

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Verified step by step guidance

Understand the concept of depreciation: Depreciation is the allocation of the cost of a tangible asset over its useful life. It is a noncash expense, meaning it does not involve any actual cash outlay during the period it is recorded.

Recognize the impact of depreciation on taxable income: Depreciation reduces the reported income on the financial statements, which in turn lowers the taxable income. This reduction in taxable income decreases the amount of taxes owed by the business.

Understand the relationship between depreciation and cash flow: Although depreciation itself does not involve cash, the reduction in taxes owed due to depreciation indirectly increases the cash flow available to the business. This is because less cash is paid out for taxes.

Clarify the role of depreciation in financial statements: Depreciation is recorded as an expense on the income statement, which affects the net income. It is also reflected in the accumulated depreciation account on the balance sheet, reducing the book value of the asset.

Summarize the correct statement: Depreciation is a noncash deduction that impacts cash flow by reducing taxable income and, consequently, the taxes paid. This indirect effect increases the cash flow available to the business.