Where does depreciation appear on the income statement?

• A. As an individual line item or embedded in COGS or operating expenses.
• B. As revenue.
• C. In the cash flow section only.
• D. In interest expense.

Answer: (A)

Depreciation is an expense that reflects the wear and tear of tangible assets over time, and it reduces the company’s reported earnings. On the income statement it appears either as its own line item labeled Depreciation Expense, or it is embedded within the costs that drive operating expenses (for manufacturing assets, in COGS; for other assets, in SG&A or similar operating expense lines). This placement shows up because depreciation is an ongoing cost of using assets to generate revenue, even though it’s a non-cash charge. It isn’t revenue, and it doesn’t sit only in the cash flow statement—though in cash flow presentation you add it back to net income in operating activities, the income statement itself will still reflect it as an expense. It also isn’t the interest expense, which is a financing cost.