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Questions and Answers
Which factor does NOT influence the choice of depreciation method?
Which factor does NOT influence the choice of depreciation method?
- Tax implications
- Asset type
- Annual revenue of the company (correct)
- Company policies
What is the objective of depreciation accounting?
What is the objective of depreciation accounting?
- To match the cost of the asset with the revenue it generates over time (correct)
- To decrease the cost of the asset over time
- To maximize tax implications of the asset
- To increase the cost of the asset over time
Which depreciation method allocates equal amounts of depreciation each year?
Which depreciation method allocates equal amounts of depreciation each year?
- Declining Balance Method
- Production Output Method
- Straight-Line Method (correct)
- Units of Production Method
What does residual value refer to in depreciation accounting?
What does residual value refer to in depreciation accounting?
What does 'useful life' of an asset refer to in depreciation accounting?
What does 'useful life' of an asset refer to in depreciation accounting?
How does the choice of depreciation method impact financial statements?
How does the choice of depreciation method impact financial statements?
What is the purpose of using the declining balance method for depreciation?
What is the purpose of using the declining balance method for depreciation?
What are the factors that influence the choice of depreciation method?
What are the factors that influence the choice of depreciation method?
Why is estimating the useful life and residual value of an asset considered challenging in depreciation accounting?
Why is estimating the useful life and residual value of an asset considered challenging in depreciation accounting?
How does compliance with accounting standards impact depreciation accounting?
How does compliance with accounting standards impact depreciation accounting?
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Study Notes
Depreciation Accounting
- The choice of depreciation method is not influenced by the asset's market value.
Objective of Depreciation Accounting
- The objective of depreciation accounting is to allocate the cost of a tangible asset over its useful life.
Depreciation Methods
- The straight-line method allocates equal amounts of depreciation each year.
Residual Value
- Residual value refers to the estimated amount that an asset can be sold for at the end of its useful life.
Useful Life
- The useful life of an asset refers to the period of time it is expected to be in use.
Impact on Financial Statements
- The choice of depreciation method impacts the amounts reported on the income statement and balance sheet, which can affect profit, assets, and cash flows.
Declining Balance Method
- The purpose of using the declining balance method for depreciation is to match the expense with the revenue generated by the asset.
Factors Influencing Depreciation Method
- Factors that influence the choice of depreciation method include the type of asset, the asset's usage, and the industry norms.
Challenges in Depreciation Accounting
- Estimating the useful life and residual value of an asset is considered challenging in depreciation accounting because it requires making predictions about the future.
Compliance with Accounting Standards
- Compliance with accounting standards, such as GAAP or IFRS, impacts depreciation accounting by providing guidelines for the choice of depreciation method, estimation of useful life, and residual value.
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