Question

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in?

1) Yes Yes
2) Yes No
3) No Yes
4) No No

Answer 1

Depreciation on machinery impacts the financial statements by reducing net income through expenses and decreasing the machinery's book value over time. Firms may opt for less capital-intensive production methods if machinery costs increase to maintain cost-effectiveness.

Step-by-step explanation:

The student's question regarding machinery acquisition and its depreciation concerns the financial impacts of depreciation on a company's finances. When machinery is acquired, it is capitalized, meaning its cost is recorded on the balance sheet and then depreciation expense is recorded over its useful life. This expense is recognized in the income statement, which reduces net income, but it is a non-cash expense, so it does not directly affect the company's cash flow. Instead, depreciation expense reduces the book value of the machinery on the balance sheet over time.

If the cost of machinery increases, impacting capital costs, firms may prefer to transition towards utilizing more labor and less capital-intensive production technologies, such as 'production technology 2' which is mentioned to have the lowest total cost. This strategic decision, aligning with the principle of cost minimization in a competitive market environment, ensures the firm remains cost-effective and can adapt to changing cost structures in inputs like machinery.