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

What financial method is typically used to calculate the depreciation of an asset over a period of time?

1. Net present value

2. Straight-line method

3. Sum-of-the-years' digits method

4. Future value calculation

The correct answer is: Straight-line method

The straight-line method is commonly used to calculate the depreciation of an asset because it allocates an equal amount of depreciation expense for each year of the asset's useful life. This method is straightforward and easy to apply, making it a preferred choice for many businesses. In practical terms, the calculation involves taking the initial cost of the asset, subtracting its estimated salvage value at the end of its useful life, and then dividing that figure by the number of years the asset is expected to be in use. This results in a consistent, predictable expense that can assist businesses in budgeting and financial reporting. While other methods like the sum-of-the-years' digits method provide accelerated depreciation—meaning more depreciation is recognized in the earlier years of the asset’s life—the straight-line method's simplicity and consistency often make it more favorable for financial planning purposes. Net present value and future value calculations are used for assessing investment potential rather than for recording depreciation.