Question

Which statement about depreciation is false?

A) Depreciation is a method of allocating the cost of an asset over its useful life.
B) Depreciation reflects the decline in market value of an asset.
C) Depreciation is applicable to both tangible and intangible assets.
D) Depreciation does not involve the expenditure of cash.

Answer 1

Statement B is false as depreciation does not reflect the actual decline in market value of an asset but rather allocates the cost of an asset over its useful life due to wear and tear or obsolescence.

Step-by-step explanation:

The subject of this question pertains to the concept of depreciation in accounting and finance. Upon examining the statements provided, we find that statement B is false. Depreciation is indeed a method of allocating the cost of an asset over its useful life (A), it does not involve the outflow of cash (D), and it is applicable to tangible assets like machinery and some intangible assets, such as patents and copyrights that have a finite useful life (C). However, depreciation does not directly reflect the decline in market value of an asset; instead, it represents the allocation of the cost of the asset over its useful life due to wear and tear or obsolescence. The market value of an asset can decrease or increase regardless of the amount of depreciation expensed.