18.1. Meaning and Need for Depreciation

Try these first

1. 1.

   Define depreciation in your own words.

   Hint

   Consider its impact on asset usability.

2. 2.

   Why is depreciation important for financial statements?

   Hint

   Think about the matching principle.

3. 3.

   What is depreciation?

   • A tax
   • A reduction in asset value
   • A cash flow

   Hint

   Think about how assets are utilized.

4. 4.

   True or False: Depreciation is only relevant for tangible assets.

   • True
   • False

   Hint

   Consider asset types.

5. 5.

   A company has three assets purchased at different times. Asset A at $5,000 with a 10-year life, Asset B at$10,000 with a 5-year life, and Asset C at $3,000 with a 15-year life. Calculate total depreciation for the first year using straight-line method.

   Hint

   Use the straight-line formula: (Cost - Residual Value) / Useful Life.

6. 6.

   If a business failed to account for depreciation, what would be the long-term impacts on its financial health?

   Hint

   Consider the ripple effect on investors and management decisions.