Depreciation Analysis

What is depreciation?

• Depreciation is the allocation of the cost of an asset over its useful life.

• Depreciation is the increase in value of an asset over time.

Explain the straight-line method of depreciation.

• The straight-line method of depreciation increases the value of an asset each year.

• The straight-line method of depreciation allocates an equal amount of depreciation expense for each year of an asset's useful life.

How is salvage value used in calculating depreciation?

• Subtract salvage value from initial cost, then divide by useful life

• Add salvage value to initial cost

Calculate the annual depreciation expense for an asset with a cost of $10,000, salvage value of $2,000, and useful life of 5 years.

• $1.600

• $1,000

How does depreciation affect the income statement?

• Depreciation is only recorded on the balance sheet.

• Depreciation reduces net income on the income statement.

In what ways does depreciation impact the balance sheet?

• Depreciation reduces the value of assets, decreasing total assets and shareholders' equity.

• Depreciation increases the value of assets, increasing total assets and shareholders' equity.

What happens to the book value of an asset as depreciation is recorded over time?

• The book value remains constant

• The book value decreases

Compare and contrast straight-line depreciation with other methods like double-declining balance.

• Straight-line depreciation evenly allocates the cost of an asset over its useful life, while double-declining balance front-loads the depreciation expense.

• Straight-line depreciation results in a higher total depreciation expense compared to double-declining balance.

Explain how depreciation can affect cash flow for a company.

• Depreciation is a non-cash expense that reduces the value of assets over time. While it reduces net income, it does not impact cash flow directly as it is a non-cash item. However, depreciation affects cash flow indirectly by reducing taxable income, which lowers tax liability and increases cash flow.

• Depreciation reduces net income but increases cash flow

Calculate the depreciation expense for an asset with a cost of $50,000, salvage value of $5,000, and useful life of 10 years.

• $4,500 per year

• $5,000 per year