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FAQs on PPT - Depreciation, Provisions and Reserves - SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

1. What is depreciation and how does it impact a company's financial statements?
Ans. Depreciation is a method used to allocate the cost of an asset over its useful life. It represents the decrease in value of assets due to wear and tear, obsolescence, or other factors. Depreciation is recorded as an expense on the income statement, reducing the company's net income and taxable income, while also reducing the value of the asset on the balance sheet.
2. What are provisions and why are they important for a company?
Ans. Provisions are liabilities that a company sets aside to cover potential future expenses or losses. They are made based on estimates and uncertainties, such as potential lawsuits, bad debts, or warranties. Provisions are important as they ensure that a company prepares for potential financial obligations and avoids understating its liabilities in the financial statements.
3. What is the difference between a provision and a reserve?
Ans. While both provisions and reserves represent funds set aside by a company, there is a key difference between the two. Provisions are specifically made to cover potential future expenses or losses, whereas reserves are retained earnings set aside for various purposes, such as distribution to shareholders, reinvestment, or contingency plans.
4. How are depreciation, provisions, and reserves reflected in a company's financial statements?
Ans. Depreciation is recorded as an expense on the income statement, reducing the company's net income. Provisions are recorded as liabilities on the balance sheet, reflecting the potential future financial obligations. Reserves, on the other hand, are shown as a separate line item on the balance sheet under shareholder's equity.
5. What are some factors to consider when determining the depreciation, provisions, and reserves for a company?
Ans. Several factors influence the determination of depreciation, provisions, and reserves. For depreciation, factors such as the asset's useful life, salvage value, and depreciation method used are considered. Provisions are based on estimates, historical data, and industry standards. Reserves are determined by the company's financial goals, regulatory requirements, and risk management strategies.
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