Which statement best describes the effect of depreciation, amortization, and depletion on financial statements?

Which statement best describes the effect of depreciation, amortization, and depletion on financial statements?

• A. They increase asset values.
• B. They reduce net income and increase cash.
• C. They reduce net income and accumulate as a contra-asset.
• D. They increase liabilities.

Answer: (C)

These are noncash expenses used to allocate the cost of assets over their useful lives. Depreciation applies to tangible fixed assets, amortization to intangible assets, and depletion to natural resources. Each period you recognize an expense on the income statement, which reduces net income, and you record the corresponding amount in a contra-asset account (accumulated depreciation, accumulated amortization, or accumulated depletion) on the balance sheet, which reduces the asset’s carrying amount. The cash effect isn’t in this period—the cash outlay occurred when the asset or resource was acquired—so these are noncash adjustments that lower reported income and reduce asset value over time.

These are noncash expenses used to allocate the cost of assets over their useful lives. Depreciation applies to tangible fixed assets, amortization to intangible assets, and depletion to natural resources. Each period you recognize an expense on the income statement, which reduces net income, and you record the corresponding amount in a contra-asset account (accumulated depreciation, accumulated amortization, or accumulated depletion) on the balance sheet, which reduces the asset’s carrying amount. The cash effect isn’t in this period—the cash outlay occurred when the asset or resource was acquired—so these are noncash adjustments that lower reported income and reduce asset value over time.