Depreciation affects which financial statements?

• A. Cash flow statement only
• B. Balance sheet only
• C. Income statement and balance sheet
• D. Statement of cash flows only

Answer: (C)

Depreciation is a non-cash expense that changes both how much the company reports as profit and how much it reports in assets. On the income statement, depreciation reduces net income because it counts as an expense for the period. On the balance sheet, the amount accumulated over time for depreciation is shown as accumulated depreciation, which reduces the net book value of fixed assets and thus lowers total assets. It doesn’t show as a cash outlay on the cash flow statement, though in the cash flow from operations section it is added back to net income to reflect that no cash was paid for that expense. So, depreciation directly impacts the income statement and the balance sheet.