Question

How does the following transaction impact cash flow?

Recognizing depreciation expense on a piece of equipment purchased six years ago.

A) Positive (Increase).
B) No Impact.
C) Negative (Decrease).
D) It depends on the depreciation method used.

Answer 1

The recognition of depreciation expense on a six-year-old piece of equipment has no impact on cash flow since it is a non-cash accounting entry. Cash was affected when the equipment was initially purchased, not during its depreciation.

Step-by-step explanation:

Recognizing depreciation expense on a piece of equipment purchased six years ago does not impact cash flow because it is a non-cash expense. The cash outflow occurred at the time of the equipment purchase, and thus the related depreciation is merely an accounting entry that reflects the allocation of the cost of the equipment over its useful life. It does not represent an actual cash transaction in the current period.

Therefore, the correct answer would be: B) No Impact.