Which statement about income statement expenses is most correct?

• A. Supplies are expensed (shown) on the income statement when consumed.
• B. All lease expense is reported on the income statement.
• C. Depreciation expense reduces reported profits and is recognized on the income statement over time.
• D. Wages and salaries are not included in the income statement.

Answer: (C)

Income statement expenses are recognized to match the period in which the related benefit is used. Depreciation expense embodies this idea by distributing the cost of a long-lived asset over its useful life. Each reporting period shows a portion of the asset’s cost as an expense, which reduces operating profit, reflecting the asset’s consumption over time. This treatment aligns with the accrual and matching principles: the cash outlay happened earlier, when the asset was purchased, but the expense is recognized gradually as the asset contributes to revenue.

Other statements are less universally precise. Supplies are expensed as they are used, with any unspent supplies remaining as an asset until consumed. Wages and salaries are indeed included as expenses on the income statement in the period earned. Lease costs can be recognized differently depending on lease type (operating versus financing leases), so saying all lease expense appears on the income statement isn’t always accurate.