Understanding Straight-Line Depreciation

What is straight-line depreciation?

• A technique for estimating future cash flows

• A way to increase asset value over time

• Straight-line depreciation is a method of allocating the cost of an asset evenly over its useful life.

• A method of calculating interest on loans

How is straight-line depreciation calculated?

• Depreciation = (Cost + Salvage Value) / Useful Life

• Depreciation = (Cost - Salvage Value) / Useful Life

• Depreciation = Cost - (Salvage Value * Useful Life)

• Depreciation = Cost / Useful Life

What is the formula for straight-line depreciation?

• (Cost - Salvage Value) / Useful Life

• (Cost - Useful Life) / Salvage Value

• (Cost + Salvage Value) / Useful Life

• (Salvage Value - Cost) / Useful Life

What are the advantages of using straight-line depreciation?

• Advantages of using straight-line depreciation include simplicity, consistency in expense recognition, and ease of understanding for financial reporting.

• It requires complex calculations for each asset.

• It is only applicable to intangible assets.

• It allows for accelerated tax benefits.

What types of assets typically use straight-line depreciation?

• Intangible assets like patents

• Inventory and raw materials

• Buildings, machinery, vehicles, and furniture.

• Cash and cash equivalents

How does straight-line depreciation affect financial statements?

• Straight-line depreciation has no effect on the balance sheet.

• Straight-line depreciation reduces net income on the income statement and decreases the asset's book value on the balance sheet.

• Straight-line depreciation only affects cash flow statements.

• Straight-line depreciation increases net income on the income statement.

What is the impact of useful life on straight-line depreciation?

• Useful life directly affects the annual depreciation expense in straight-line depreciation.

• Longer useful life increases the total asset value.

• Useful life has no effect on depreciation calculations.

• Depreciation is calculated based on market value, not useful life.

Can straight-line depreciation be used for tax purposes?

• Straight-line depreciation can only be used for personal expenses.

• Yes, straight-line depreciation can be used for tax purposes.

• Straight-line depreciation is only applicable to real estate investments.

• No, straight-line depreciation is not allowed for tax purposes.

What happens if an asset is sold before the end of its useful life?

• The asset will always appreciate in value.

• The asset's useful life is extended indefinitely.

• The asset may result in a gain or loss depending on the sale price relative to its book value.

• The asset can only be sold at its original purchase price.

How does straight-line depreciation differ from declining balance depreciation?

• Both methods result in the same total depreciation over the asset's life.

• Straight-line depreciation is even over time; declining balance depreciation decreases over time.

• Straight-line depreciation is only used for tangible assets; declining balance can be used for intangible assets.

• Straight-line depreciation increases over time; declining balance depreciation is even.