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Principles of Finance

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Principles of FinanceVideo Activity

Depreciation Basics! With Journal Entries

1 .
In what ways do depreciation and capitalization impact the income statement? If you were an investor considering investing a large sum of money into a company, what questions would you ask or what accounts would you look at to assess the impact to their income statement specifically? How would the characteristics of capitalization affect your feelings toward investing in the company?
2 .
If a company spends a large sum of cash to invest in equipment or another fixed asset, resulting in a loss that year on the income statement if they expense it, have they really experienced a loss? Or have they simply traded one asset for another? How does this delineation relate to capitalizing an asset and spreading out the cost throughout its useful life? Do you feel the depreciation process is ethical? Or do you feel it hides the true cost of business from being fully transparent on the financial statements? Explain your answer.

Difference between Cash Flow and Profit

3 .
When a business incurs an expense (office supplies, utilities, or wages, for example), is their cash flow the same in both timing and amount as the expense they recognize?
4 .
What are the key components necessary to calculate profit or loss for a business? Are they the same elements necessary to calculate cash flow?
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