10EGB TEST BOOK UNIT 16

What is depreciation of fixed assets?

• Depreciation is the total cost of purchasing fixed assets.

• Depreciation is the increase in value of fixed assets over time.

• Depreciation refers to the cash flow generated by fixed assets.

• Depreciation of fixed assets is the allocation of the cost of a fixed asset over its useful life.

Why is depreciation important for businesses?

• Depreciation increases the value of assets over time.

• Depreciation has no impact on cash flow management.

• Depreciation helps businesses manage asset costs, reflect true asset value, and reduce taxable income.

• Depreciation is only relevant for tax-exempt organizations.

What are the common methods of calculating depreciation?

• Cash flow method

• Market value method

• Common methods of calculating depreciation include straight-line, declining balance, and units of production.

• Average cost method

How does straight-line depreciation work?

• Straight-line depreciation spreads the cost of an asset evenly over its useful life.

• It calculates depreciation based on the asset's market value.

• Depreciation is only applied when the asset is sold.

• It allows for accelerated depreciation in the first year.

What is the declining balance method of depreciation?

• A method that only applies to intangible assets like patents and trademarks.

• A method that calculates depreciation based on the asset's original cost.

• A linear depreciation method that spreads the cost evenly over the asset's life.

• The declining balance method of depreciation is an accelerated depreciation method that applies a constant percentage to the declining book value of an asset.

What factors affect the depreciation of an asset?

• Initial purchase price

• Location of the asset

• Color of the asset

• Factors affecting depreciation include useful life, wear and tear, obsolescence, market demand, maintenance costs, and economic conditions.

How do tax regulations influence asset depreciation?

• Tax regulations influence asset depreciation by determining allowable methods and rates for depreciation, affecting taxable income.

• Asset depreciation is solely determined by market value fluctuations.

• Tax regulations only affect income tax rates, not asset depreciation.

• Tax regulations have no impact on asset depreciation methods.

What is the difference between tangible and intangible asset depreciation?

• Depreciation applies only to intangible assets, not tangible ones.

• Tangible asset depreciation applies to physical assets, while intangible asset depreciation (amortization) applies to non-physical assets.

• Both tangible and intangible assets depreciate at the same rate.

• Tangible assets are only depreciated, while intangible assets are not.

How can businesses estimate the useful life of an asset?

• Businesses estimate the useful life of an asset by analyzing usage patterns, industry standards, and maintenance history.

• By assuming all assets last 10 years

• By following the manufacturer's warranty period exclusively

• By calculating the initial purchase price only

What impact does depreciation have on financial statements?

• Depreciation has no effect on the balance sheet but reduces revenue on the income statement.

• Depreciation decreases asset values on the balance sheet and increases expenses on the income statement.

• Depreciation increases asset values on the balance sheet and decreases expenses on the income statement.

• Depreciation only affects cash flow and not the financial statements.