Depreciation on an asset affects which line item on the income statement?

Depreciation on an asset affects which line item on the income statement?

• A. Net income
• B. Cash balance
• C. Inventory value
• D. Accounts payable

Answer: (A)

Depreciation is a non-cash expense that allocates the cost of a fixed asset over its useful life. Because it is recognized as an expense, it reduces the earnings reported on the income statement. It typically appears as depreciation expense within operating expenses and lowers both operating income and net income. The cash balance isn’t changed when depreciation is recorded, since no cash is paid in that moment; the cash effect is felt earlier when the asset was purchased and, in the cash flow statement, depreciation is added back to net income to reconcile to cash flow from operations. Depreciation also doesn’t alter inventory value or accounts payable, which are balance sheet items. So, net income is the line item on the income statement that is affected.

Depreciation is a non-cash expense that allocates the cost of a fixed asset over its useful life. Because it is recognized as an expense, it reduces the earnings reported on the income statement. It typically appears as depreciation expense within operating expenses and lowers both operating income and net income. The cash balance isn’t changed when depreciation is recorded, since no cash is paid in that moment; the cash effect is felt earlier when the asset was purchased and, in the cash flow statement, depreciation is added back to net income to reconcile to cash flow from operations. Depreciation also doesn’t alter inventory value or accounts payable, which are balance sheet items. So, net income is the line item on the income statement that is affected.