For an all-equity firm, adding depreciation expense to net profit equals:
A) profit before tax.
B) total revenues.
C) the depreciation tax shield.
D)cash flows from operations.

Question

Quizplus · Accepted Answer

Depreciation expense is a non-cash charge that reduces net profit. When you add it back to net profit, you are essentially adjusting for this non-cash expense to get a better picture of the cash flows generated from operations. This is a common adjustment made in the calculation of cash flows from operations, as it reflects the cash that is available for use in the business, not being actually spent.

For an All-Equity Firm, Adding Depreciation Expense to Net Profit