Depreciation Quiz

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Questions and Answers

What is depreciation?

  • The process of allocating the cost of inventory over their useful lives
  • The process of allocating the cost of tangible assets over their useful lives (correct)
  • The process of allocating the cost of intangible assets over their useful lives
  • The process of allocating the cost of liabilities over their useful lives

Which method of depreciation assumes that the asset provides more economic benefits in the early years of its useful life?

  • Straight-line method
  • Units of production method
  • Sum-of-the-years'-digits method
  • Double-declining balance method (correct)

How does depreciation affect the financial statements?

  • Reduces the value of assets on the balance sheet and reduces net income on the income statement (correct)
  • Increases the value of assets on the balance sheet and increases net income on the income statement
  • Increases the value of assets on the balance sheet and reduces net income on the income statement
  • Reduces the value of assets on the balance sheet and increases net income on the income statement

What is the purpose of journal entries relating to Depreciation?

<p>To record the allocation of the asset's cost over its useful life (A)</p> Signup and view all the answers

Which of the following is a characteristic of the straight-line method of depreciation?

<p>It allocates an equal amount of depreciation expense each accounting period (C)</p> Signup and view all the answers

How does the choice of depreciation method affect the financial statements?

<p>It impacts the amount of depreciation expense and therefore, the net income (C)</p> Signup and view all the answers

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Study Notes

Depreciation Fundamentals

  • Depreciation is a non-cash expense that represents the allocation of the cost of a tangible asset over its useful life.

Depreciation Methods

  • The reducing balance method of depreciation assumes that the asset provides more economic benefits in the early years of its useful life.
  • The straight-line method of depreciation is characterized by allocating the cost of the asset evenly over its useful life.

Impact on Financial Statements

  • Depreciation affects the financial statements by reducing the net income reported on the income statement and the carrying value of the asset on the balance sheet.
  • Depreciation expense is reported on the income statement, and the accumulated depreciation is reported on the balance sheet.

Journal Entries

  • The purpose of journal entries relating to depreciation is to record the expense and reduce the carrying value of the asset.

Depreciation Method Choice

  • The choice of depreciation method affects the financial statements by influencing the amount of depreciation expense reported each period, which in turn affects net income and the carrying value of the asset on the balance sheet.

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