When using the indirect method to complete the cash flows from operating activities section,what is the proper treatment of depreciation expense?
A) Subtract depreciation expense from net income.
B) Add depreciation expense to net income.
C) Disregard depreciation expense because it relates to an investing activity.
D) Disregard depreciation expense because it is a noncash expense.

Question

Quizplus · Accepted Answer

Depreciation expense is a noncash expense that reduces net income. Therefore, it needs to be added back to net income in the operating activities section of the statement of cash flows under the indirect method. This is because depreciation expense does not involve actual cash outflow, but it is a noncash expense that is charged against revenues to allocate the cost of a long-term asset over its useful life.

When Using the Indirect Method to Complete the Cash Flows