Which of the following is a direct impact of depreciation on financial statements?

Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. This process reflects the wearing out or obsolescence of the asset. One of the primary effects of depreciation on financial statements is the reduction of the asset's book value on the balance sheet.

When depreciation is recorded, it decreases the asset's value that is reported under non-current assets. This reduction is accounted for on the balance sheet, which provides a more accurate picture of the asset's value and the company's financial position. It is important because it helps stakeholders understand how much of the asset's original cost has already been expensed and how much value remains. This is crucial for assessing the company's long-term assets and can influence decisions regarding investment, financing, and operational strategies.

The other options may not directly connect with the impact of depreciation in the same way; for instance, depreciation typically reduces taxable income, which could impact cash flow but does not increase it directly. Therefore, the correct choice centers on the fundamental accounting principle that depreciation reduces the recorded value of assets on financial statements.