American Institute of Certified Public Accountants (AICPA) Practice Exam

Depreciation impacts a company's financial statements primarily by reducing the asset's book value and net income. This process systematically allocates the cost of tangible assets over their useful lives, reflecting the wear and tear on those assets.

When depreciation is recorded, it decreases the book value of the corresponding asset on the balance sheet. This adjustment is essential for accurately presenting the company’s financial position, as it reflects the decline in the value of the asset over time.

Additionally, depreciation is recorded as an expense on the income statement, which leads to a reduction in net income. This is significant because net income is a critical measure for investors and analysts gauging the company's profitability. While it is a non-cash expense (meaning it does not directly impact cash flow at the time of recording), it does affect the bottom line, influencing investors' perceptions and potentially leading to different investment decisions.

This understanding is vital for financial analysis and reflects a company’s operational efficiency and asset management practices, making the impact of depreciation on financial statements a key area of focus for accountants and financial analysts.