Depreciation as Non-Cash Allocation for Fixed Assets

Steps:

• Evaluate statement 1: Depreciation allocates asset cost over time without cash outflow, confirming it's a non-cash expense.
• Evaluate statement 2: It represents the portion of non-current asset cost charged annually, often viewed as funds for eventual replacement.
• Evaluate statement 3: Depreciation applies to non-current (fixed) assets, not current assets like inventory, making this incorrect.
• Evaluate statement 4: It concerns gradual value loss in non-current assets due to wear or obsolescence, not current assets.

Why B is correct:

• Per accounting standards (e.g., IAS 16), depreciation is a non-cash expense systematically allocating non-current asset costs, with statement 2 aligning as a practical interpretation for replacement provision.

Why the others are wrong:

• A includes incorrect 3, misapplying to current assets.
• C and D include incorrect 4, confusing asset types.

Final answer: B