On which of the following financial statements is depreciation expense reported as a decrease in net income in a single-step income statement?

• A. Balance Sheet
• B. Income Statement
• C. Statement of Cash Flows
• D. Statement of Retained Earnings

Answer: (B)

Verified step by step guidance

1. Understand the concept of depreciation expense: Depreciation expense represents the allocation of the cost of a tangible asset over its useful life. It is recorded as an expense in the financial statements to reflect the reduction in the asset's value due to usage or wear and tear.
2. Identify the purpose of the Income Statement: The Income Statement is a financial report that shows a company's revenues, expenses, and net income or loss over a specific period. Depreciation expense is reported here as it is part of the operating expenses that reduce net income.
3. Clarify why depreciation expense is not reported on the Balance Sheet: The Balance Sheet shows the company's financial position at a specific point in time, including assets, liabilities, and equity. While accumulated depreciation (a contra-asset account) is reported on the Balance Sheet, depreciation expense itself is not included here.
4. Explain why depreciation expense is not reported on the Statement of Cash Flows: The Statement of Cash Flows tracks cash inflows and outflows. Depreciation expense is a non-cash item and is added back to net income in the operating activities section, but it is not directly reported as an expense here.
5. Discuss why depreciation expense is not reported on the Statement of Retained Earnings: The Statement of Retained Earnings shows changes in retained earnings due to net income and dividends. Depreciation expense indirectly affects retained earnings through its impact on net income, but it is not explicitly reported on this statement.