Question 3:

Depreciation is considered as accounting policy and operational expense for the accounting period. The value to be included in the financial statement is calculated based on the decision of the Board.

(a) You are required to:

(i) Explain the difference between capital expenditure and revenue expenditure, and how each type of expenditure will affect the financial statements of a business.

(ii) Explain why it is important to distinguish between capital expenditure and revenue expenditure, and briefly explain the accounting treatment of each type of expenditure.

(iii) Under what circumstances will you consider the reducing balance method as the most appropriate method in calculating depreciation?

(b) Does depreciation decrease cash in a business? Explain your answer.