Question

Depreciation for a tax-paying firm:_________.
a) increases expenses and lowers taxes.
b) increases the net fixed assets as shown on the balance sheet.
c) reduces both the net fixed assets and the costs of a firm.
d) is a noncash expense that increases the net income.
e) decreases net fixed assets, net income, and operating cash flows.

Answer 1

Answer: a) increases expenses and lowers taxes.

Explanation:

Depreciation accounts for the wear and tear in fixed assets over their period of use. It is accounted for every period in the Income Statement as an expense which means that its addition increases the business's expenses.

It does that the advantage of being tax deductible however. This then means that it can be subtracted from Net Income for tax purposes. When that is done, it will reduce the Net Income thereby reducing the amount of taxes that can be charged on the company.