Why is depreciation added to net income in the Operating Activities category of the statement of cash flows when the indirect method is used?
A)Depreciation expense is a negative amount in the Investing Activities section and therefore is a positive amount in the Operating Activities section.
B)Depreciation provides cash and therefore must be added to net income.
C)Depreciation was deducted in arriving at net income on the accrual basis of accounting;however,it did not require the use of cash.
D)Depreciation reduced the book value of plant assets and,therefore,must be reported as an investing activity.

Question

Quizplus · Accepted Answer

Depreciation is a non-cash expense that reduces net income on the accrual basis of accounting. Therefore, it is added back to net income when using the indirect method to arrive at cash flows from operating activities. The concept behind the indirect method is to adjust net income for all non-cash items, such as depreciation, that were deducted in arriving at net income. This adjustment helps in arriving at the actual cash flows generated or used by the operating activities of the business.

Why Is Depreciation Added to Net Income in the Operating