Final answer:
The statement is false; depreciation reduces a company's taxable income, thereby affecting the income taxes it owes by decreasing reported earnings due to the non-cash charge of depreciation expense.
Step-by-step explanation:
The statement that depreciation has no effect on income taxes is false. Depreciation is an accounting method that allows a business to allocate the cost of a plant asset over its useful life. This expense is deducted from the company's revenue to determine taxable income. As a non-cash charge, depreciation reduces the amount of reported earnings, thus decreasing the income tax owed by the company during the period.
For example, if a company purchases a piece of equipment for $100,000 with a useful life of 10 years, it could depreciate the asset by $10,000 annually. This depreciation expense would then reduce the company's taxable income by $10,000 each year, resulting in lower income taxes for that year.