Which option correctly gives the net effect of gross investment and depreciation on capital?
Answer and explanation
Correct answer: Gross investment increases capital and depreciation reduces capital
Gross investment represents additions to the stock of productive assets, so its direct effect is to increase capital. Depreciation represents the portion of fixed capital consumed through use, ageing or obsolescence, so its effect is to reduce capital value or capacity. Their difference gives net investment. The other options either reverse these effects or incorrectly classify both items as consumption.
Frequently asked questions
What is the correct answer to this question?
Gross investment increases capital and depreciation reduces capital
Why is this the correct answer?
Gross investment represents additions to the stock of productive assets, so its direct effect is to increase capital. Depreciation represents the portion of fixed capital consumed through use, ageing or obsolescence, so its effect is to reduce capital value or capacity. Their difference gives net investment. The other options either reverse these effects or incorrectly classify both items as consumption.
Which subject and chapter does this question cover?
This is a Class 11 Accountancy question. Chapter: Depreciation, Provisions, and Reserves.
