Depreciation allocates an asset's cost over its useful life

Steps:

• Define depreciation as the systematic allocation of an asset's depreciable amount over its useful life per IAS 16.
• Assess statement 1: Correct, as it reduces profit by matching expense to revenue in the income statement.
• Assess statement 2: Incorrect, as it is a non-cash expense, not an actual cash outflow.
• Assess statement 3: Correct, as the charge is based on the asset's estimated useful life and residual value.

Why B is correct:

• Statements 1 and 3 align with the matching principle in accrual accounting, where depreciation expense is recognized annually.

Why the others are wrong:

• A includes incorrect statement 2, confusing non-cash expense with cash flow.
• C pairs incorrect 2 with correct 3, omitting valid 1.
• D ignores correct statements 1 and 3.

Final answer: B