Which statement describes straight-line depreciation and its effect on the financial statements?

Which statement describes straight-line depreciation and its effect on the financial statements?

• A. A fixed amount is expensed each period; increases depreciation expense on income statement and increases accumulated depreciation on balance sheet, reducing net income and net book value.
• B. A variable amount; only affects cash; increases cash.
• C. Depreciation is recorded only at asset purchase; has no effect on income statement.
• D. Depreciation increases revenue.

Answer: (A)

Straight-line depreciation spreads the asset’s cost evenly over its useful life, so you record the same depreciation amount each period. That amount shows up as depreciation expense on the income statement, which lowers net income. On the balance sheet, you accumulate the same amount in a contra-asset account called accumulated depreciation, which reduces the asset’s net book value over time. Because depreciation is a noncash expense, it does not involve a cash outlay in the period; the cash cost was at the time of purchase, and the effect is seen in reduced reported income and a lower asset value. The other descriptions don’t fit: depreciation isn’t variable or limited to the purchase date, it doesn’t affect cash directly in the period, and it does not increase revenue.

Straight-line depreciation spreads the asset’s cost evenly over its useful life, so you record the same depreciation amount each period. That amount shows up as depreciation expense on the income statement, which lowers net income. On the balance sheet, you accumulate the same amount in a contra-asset account called accumulated depreciation, which reduces the asset’s net book value over time. Because depreciation is a noncash expense, it does not involve a cash outlay in the period; the cash cost was at the time of purchase, and the effect is seen in reduced reported income and a lower asset value. The other descriptions don’t fit: depreciation isn’t variable or limited to the purchase date, it doesn’t affect cash directly in the period, and it does not increase revenue.