Final answer:
The statement is false because depreciation reduces taxable income, thereby affecting income taxes owed by a company. It serves as a tax shield although it does not affect actual cash flow since it is a non-cash expense.
Step-by-step explanation:
The statement that "Depreciation has no effect on income taxes since its effect is a reduction in a plant asset's book value" is false. Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. In doing so, it reduces the reported income before taxes on the income statement, which in turn reduces the amount of income tax a company owes.
This process thus provides a tax shield because companies can use depreciation to lower their taxable income; therefore, depreciation has a direct effect on the amount of income tax they pay. The higher the depreciation expense, the lower the taxable income, and consequently, the lower the income taxes paid.
It's important to note, however, that the actual cash flow of the company is not affected by depreciation since it's a non-cash expense.