18.7. Impact of Depreciation on Financial Statements

Try these first

1. 1.

   What accounts are affected by depreciation?

   Hint

   Think about where expenses and assets are recorded.

2. 2.

   How does depreciation affect net profit?

   Hint

   Consider how expenses influence profitability.

3. 3.

   How does depreciation affect net profit?

   • Increases
   • Reduces
   • No effect

   Hint

   Think about how expenses affect profit.

4. 4.

   True or False: Depreciation is only recorded in the income statement.

   • True
   • False

   Hint

   Consider where financial impacts are shown.

5. 5.

   A company has three assets valued at $15,000 each with a residual value of$3,000 and a useful life of 5 years. Calculate the annual depreciation using the straight-line method and discuss the impact on the financial statements over the asset’s life.

   Hint

   Consider both profit reductions and balance sheet impacts over time.

6. 6.

   If a business decides to change from a straight-line to a declining balance method for depreciation, explain how this might affect the financial reports in the first two years.

   Hint

   Think about the differences in expense allocation over time.