After one year, what impact does depreciation have on Operating Income for Apple's factory investment?

• A. Increases by $10
• B. Decreases by $10
• C. Stays the same
• D. Increases by $20

Answer: (B)

The correct answer highlights how depreciation affects operating income, which is a key component of financial statements. When a company invests in a factory, that investment usually includes significant capital expenditures, such as machinery and buildings, which have a useful life extending beyond one year.

Depreciation represents the allocation of the cost of these fixed assets over their useful lives. On the income statement, depreciation expense reduces operating income because it is treated as a cost of doing business. In this context, if the factory investment incurs a depreciation expense, it will directly reduce operating income for that year.

For example, if the factory’s machinery is being depreciated at a rate of $10 per year, this means that $10 is deducted from gross profits to calculate operating income. Thus, if Apple had a certain level of operating income prior to accounting for depreciation, the process of incorporating this $10 expense will lead to a decrease in operating income by that same amount.

The impact of depreciation highlights its role as a non-cash expense that still influences profitability metrics, clarifying why operating income would decrease rather than increase or stay the same over the period of one year.