18.1.2. Why is Depreciation Necessary?

Try these first

1. 1.

   What is depreciation?

   Hint

   Think about how assets lose value.

2. 2.

   Why is matching costs with revenues important?

   Hint

   Consider what happens if costs are ignored.

3. 3.

   What does depreciation help achieve in accounting?

   • A) Overstate income
   • B) Match asset costs with revenues
   • C) Avoid financial reporting
   • D) None of the above

   Hint

   Consider why expenses are matched with income.

4. 4.

   True or False: Depreciation is not required under any accounting standards.

   • True
   • False

   Hint

   Think about the consequences of ignoring accounting standards.

5. 5.

   A company buys a truck for $30,000, with a residual value of$3,000 and a useful life of 5 years. Calculate the annual depreciation using the straight-line method and describe its importance in financial reporting.

   Hint

   Consider how the truck's value changes over the years.

6. 6.

   How would a company’s decision to change its depreciation method from straight-line to declining balance affect its financial statements and cash flow management?

   Hint

   Think about the implications of depreciation on cash flow and income reporting.