Is it true that as depreciation reduces profits and does not take cash out of business, it is a way of keeping cash inside the business to provide for the eventual replacement of the asset at the end of its life?

(a)    By charging depreciation on fixed assets, it does not mean that a business will set aside the same amount of cash in a bank account to provide for the replacement of the asset. It is important to understand that depreciation is NOT a way of saving for replacement assets

(b)   Depreciation merely allocates the purchase cost of a fixed asset over its life. At the end of its life, the asset might cost more to replace( because of inflation) or it might not be replaced at all, because a similar new asset might not be worth having. Note that even when a fixed asset will not be replaced, its purchase cost should still be charged as depreciation to accounting periods over its life.