18.3. Characteristics of Depreciation

Try these first

1. 1.

   What is depreciation?

   Hint

   Think about how businesses track asset values over time.

2. 2.

   Is depreciation a cash expense?

   Hint

   Consider how financial statements categorize expenses.

3. 3.

   Which of the following statements is true about depreciation?

   • A. It applies to intangible assets.
   • B. It is a cash expense.
   • C. It reduces the book value of an asset.

   Hint

   Think about what happens to assets as they age.

4. 4.

   True or False: Depreciation is necessary for maintaining accurate financial statements.

   • True
   • False

   Hint

   Consider why businesses report their profits.

5. 5.

   A factory buys a new machine for $100,000, which is expected to have a useful life of 10 years and a residual value of$10,000. Calculate the annual depreciation and discuss its implications for financial planning.

   Hint

   Use the depreciation formula discussed earlier.

6. 6.

   If a company decided to sell an asset worth $50,000 after 5 years with an annual depreciation of$5,000, what would be the book value at the time of sale? Also, discuss how such decisions impact investor perception.

   Hint

   Calculate as before and consider the bigger picture of company strategy.