If a company understates its depreciation expenses for a period, then its reported assets will be overstated.

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BlackTom AI · Accepted Answer

Consider the statement: 'If a company understates its depreciation expenses for a period, then its reported assets will be overstated.'
Option 1 (True): When depreciation expense is understated, depreciation expense is lower than it should be, which means net income is higher than it ought to be and accumulated depreciation is understated. Since accumulated depreciation reduces the book value of property, plant, and equipment (PPE), understating depreciation leads to a higher recorded asset value for PPE than the correct amount. In short, understating depreciation leaves assets carrying amounts inflated, so reported assets are indeed overstated.
Option 2 (False): This would be incorrect because understating depreciation directly affects the contra-asset accumulation (accumulated depreciation) and the book value of assets. If depreciation is understated, the asset base remains larger on the balance sheet than it should be, which contradicts the claim that assets would be understated. Therefore, this option misstates the bookkeeping effect of depreciation.
Overall, understanding the linkage: depreciation lowers asset value over time, so understating that expense slows down the reduction, resulting in higher asset carrying amounts rather than lower ones.

Introduction to Financial Accounting M5: Quiz

If a company understates its depreciation expenses for a period, then its reported assets will be overstated.

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