Depreciation Is an Arbitrary Allocation of the Cost of an Asset

question 16

True/False

Depreciation is an arbitrary allocation of the cost of an asset and as such it is not a cash item and is not reported on the cash flow statement, but it still needs to be deducted from operating profit in the calculation of net cash flows from operating activities.

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Definitions:

Partners' Equity

The owners' claim against the partnership assets, representing their share of the business's total equity.

Partnership Earnings

The share of profits or losses generated by a partnership that is allocated to each partner according to their agreement.

Federal Income Tax

A tax levied by the federal government on the annual earnings of individuals, corporations, trusts, and other legal entities.

Incoming Partner

A new member joining a partnership, bringing capital to the business in exchange for a share of the partnership's profits and losses.