Reference no: EM131223167

Depreciation moves the cost of an asset to Depreciation Expense during the asset's useful life. The accounts involved in recording depreciation are Depreciation Expense and Accumulated Depreciation. As you can see, cash is not involved. In other words, depreciation reduces net income on the income statement, but it does not reduce the Cash account on the balance sheet.

Because we begin preparing the statement of cash flows using the net income figure taken from the income statement, we need to adjust the net income figure so that it is not reduced by Depreciation Expense. To do this, we add back the amount of the Depreciation Expense.

Depletion Expense and Amortization Expense are accounts similar to Depreciation Expense, as all three involve allocating the cost of a long-term asset to an expense over the useful life of the asset. There is no cash involved.

Controversial Claim Since the cash account is never involved, except through the tax-shield generated by the depreciation expense, it does not make economic and/or accounting sense for corporations to keep track of the depreciation in their income statements that are prepared for the general public. For simplicity, assume that all taxes are zero, so there is no depreciation tax shield to consider.

Objective Students are expected to argue in favor of positions they may not necessarily agree with, and in the process, learn to understand where opposing views come from. Such skills are necessary to stay away from "incestuous amplification" that arises from groups of people who think alike. You are required to refute the statement made as if it was made in a court of law in front of a judge.