Which of the following statements best describes depreciation?

Depreciation is best described as a non-cash expense that allocates the cost of an asset over its useful life. This is central to financial reporting because it allows for a systematic recognition of the decline in economic value of an asset due to usage, wear and tear, or obsolescence. Through this allocation method, businesses can reflect the consumption of their assets on the income statement, matching the expense with the revenues generated from the use of the asset in each accounting period.

This concept is important because even though depreciation affects the net income reported (by reducing taxable income, for instance), it does not involve any actual cash outflow during the period it is recorded. By understanding depreciation as a method to distribute the cost of an asset over its useful life, financial statements can present a more accurate picture of a company's operational performance and asset utilization.

In contrast, other options fail to capture the essence of depreciation accurately or are too restrictive. For instance, asserting that depreciation increases net asset value contradicts the principle that depreciation reduces the book value of an asset over time. Saying it only applies to tangible assets ignores that certain intangible assets can also experience amortization, which is a similar concept. Lastly, suggesting that depreciation is a way to increase cash flow