How does an increase in Depreciation affect the Income Statement?

• A. It increases Operating Income
• B. It decreases Operating Income
• C. It has no effect
• D. It increases Net Income

Answer: (B)

An increase in Depreciation reduces Operating Income on the Income Statement. This is due to the fact that depreciation is considered an expense. When depreciation expense rises, it directly decreases the company's earnings before interest and taxes (EBIT), which is reflected in Operating Income.

As a non-cash charge, depreciation does not impact cash flow directly but affects profit calculations by lowering taxable income, which can subsequently affect Net Income as well. However, in the context of the question, focusing purely on Operating Income clarifies that higher depreciation contributes to lower operating profit. Thus, the correct choice effectively captures how depreciation expense behaves within the Income Statement's structure.