Future Business Leaders of America (FBLA) Business Calculations Practice Test

In a depreciation calculation, what is the purpose of the salvage value?

1. It determines the buy price.

2. It indicates potential profit.

3. It reflects the asset's residual worth after its useful life.

4. It affects operational costs.

The correct answer is: It reflects the asset's residual worth after its useful life.

In a depreciation calculation, the salvage value is significant because it reflects the asset's residual worth after its useful life. When businesses acquire fixed assets, they do so with the expectation that these assets will lose value over time due to wear and tear, obsolescence, or market factors. Depreciation is the accounting method used to allocate the cost of a tangible asset over its useful life. The salvage value, also known as residual value, is the estimated amount that an asset is expected to be worth at the end of its useful service life. This value plays a crucial role in determining the total depreciation expense. By subtracting the salvage value from the initial cost of the asset, a company can calculate the total depreciable amount. The choice of a higher or lower salvage value directly impacts annual depreciation calculations, as it determines how much of the asset's cost needs to be depreciated over its useful life. Understanding salvage value is essential for accurate financial reporting and asset management, as it helps businesses to make informed decisions regarding the acquisition and utilization of their physical assets.