Final answer:
The financial statement effects of annual depreciation in years 3 to 6 include reducing the asset's book value on the balance sheet and recording a depreciation expense on the income statement, which lowers net income. Cumulative depreciation over these years also impacts tax situations, as it is typically a deductible expense.
Step-by-step explanation:
The financial statement effects of depreciation from years 3 to 6 primarily involve the reduction of the asset's book value on the balance sheet and the recognition of depreciation expense on the income statement. On the balance sheet, the asset's net book value will decrease each year by the amount of the annual depreciation. This decrease in assets also reduces the company's equity, as it represents an allocation of cost over the asset's useful life. On the income statement, the depreciation expense will reduce the company's net income, as it is a non-cash expense that still affects the company's profitability.
Moreover, over the period of years 3 to 6, the cumulative effect of depreciation has to be considered. It is not just a single year's impact but a series of annual impacts that accumulate. This cumulative effect will also impact the company's tax situation since depreciation is typically a deductible expense, potentially reducing taxable income in each of those years. Companies must manage this impact effectively as part of their long-term financial planning strategies.