CSLB Contractor's Law & Business Practice Exam

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Prepare for the CSLB Contractor's Law and Business Exam. Use flashcards and multiple choice questions, each with hints and explanations. Enhance your exam readiness!

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What will happen to reported net income if depreciation is included in the first year but not in the second year?

Your net income will be lower than it should be in the second year.
Your net income will be accurate in the second year.
Your net income will be greater than it should be in the second year.
Your net income will be unaffected in the second year.

The correct answer is: Your net income will be greater than it should be in the second year.

When depreciation is included as an expense in the first year, it reduces the reported net income for that year by accounting for the wear and tear of assets over time. If depreciation is not included in the second year, the benefits of that expense are effectively removed from the income statement during that period. Without deducting depreciation, the costs associated with the use of the asset are not recognized, leading to a situation where the net income reported will be artificially inflated. Thus, in the second year, not accounting for depreciation results in a net income that is greater than it would have accurately been, considering the ongoing use of the asset. This understanding clarifies why, without the depreciation expense in the second year, net income appears higher, thereby making the correct answer the one indicating that net income will be greater than it should be in that year.