Investment Banking Basics Practice Test 2026 – The All-in-One Guide to Mastering Your Exam!

Depreciation is an expense used to allocate the cost of a long-term asset over its useful life. Because it is an expense, it reduces earnings before tax on the income statement. It may appear as a separate line item or be embedded in COGS or operating expenses, but its effect is the same: it lowers pretax income. It does not increase net income; after tax this expense reduces net income, though it can create a tax shield that lowers taxes. So the correct takeaway is that depreciation always reduces pre-tax income.