Question

State with reasons whether following statements are True or False:
Depreciation ensures sufficient cash for asset replacement

Answer 1

This statement is false. Depreciation does not mean money set aside for the future replacement of asset. It is provided to match the use of asset, its deterioration and obsolescence with the income it generates. Depreciation is neither a source nor use of funds. The original investment of the asset should be fully recovered into the product cost during the economic life of an asset.