18.1.1. What is Depreciation?

Try these first

1. 1.

   What is the main purpose of depreciation in accounting?

   Hint

   Think about how companies report profits.

2. 2.

   Define 'fixed asset'.

   Hint

   What are some examples of these types of assets?

3. 3.

   What is depreciation?

   • A method to increase asset value
   • A systematic allocation of asset cost
   • A type of cash flow

   Hint

   It involves reducing the value of tangible assets.

4. 4.

   True or False: Depreciation represents actual cash expenses for a business.

   • True
   • False

   Hint

   Think about the nature of depreciation as an accounting concept.

5. 5.

   A company has purchased a piece of machinery for $50,000 with a residual value of$5,000 and a useful life of 10 years. Calculate the annual depreciation using the straight-line method. What would the book value be after 3 years?

   Hint

   Remember the formula for straight-line depreciation.

6. 6.

   Discuss the impact on businesses if depreciation is not accurately reported. What effects might this have on financial analysis, investment decisions, and stakeholder trust?

   Hint

   Think about financial stakeholders and their perspectives.