Question

Which of the following statement is false?
(I) Depreciation expenses shown on a company's income statement must be the same amount as the depreciation expenses of the company's income-tax return.
(II) The purpose of depreciation is to have the balance sheet report the current value of an asset.
(III) Depreciation expenses reflects an allocation of an asset's original cost rather than an allocation based on the economic value that as being consumed.
(IV) One company might depreciate a new computer over three years while another company might depreciate the same model computer over five years and both companies are right.
The correct answer is _________________.

• A. (I) & (III)
• B. (II) &(IV)
• C. (I) & (II)
• D. (I), (II), & (III)

Answer 1

The correct option is C (I) & (II)

(I) A depreciation expense has a direct effect on the profit that appears on a company's income statement. The larger the depreciation expense in a given year, the lower the company's reported net income – its profit. However, because depreciation is a non-cash expense, the expense doesn't change the company's cash flow.

(II) Depreciation Expense reflects an allocation of an asset's original cost rather than an allocation based on the economic value that is being consumed. This is true because of the cost principle and the matching principle. An asset (such as a computer) may have a very long physical life.