Which statement concerning depreciation expense is most correct?

• A. Depreciation expense is recorded only when assets are sold.
• B. Depreciation expense accounts for the loss of value of fixed assets (plant and equipment).
• C. Depreciation expense has no impact on net income.
• D. Depreciation expense is a cash outflow.

Answer: (B)

Depreciation expense reflects the allocation of the cost of fixed assets over their useful lives, capturing the wear, aging, and obsolescence of plant and equipment. It’s an operating expense recognized periodically to match the expense of using the asset with the revenue it helps generate. Because it is a non-cash item, it reduces reported net income, even though no cash leaves the company in the period it’s recorded (the cash was spent when the asset was acquired). It is not limited to times when assets are sold, and it does impact net income; it is not a cash outflow.