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Basic Question 1 of 11
In the statement of cash flows prepared under the indirect method, depreciation expense is treated as an adjustment to net income because it ______
B. generally represents a small part of operating expenses.
C. is an inflow of cash used to replace aging plant assets.
A. reduces net income but does not involve an outflow of cash.
B. generally represents a small part of operating expenses.
C. is an inflow of cash used to replace aging plant assets.
User Contributed Comments 4
| User | Comment |
|---|---|
| mirfanrana | depreciation is a non cash expense which reduces net income. |
| Murrayman | Reduces net income but does not involve an outflow of cash... in the period in which you are reporting. Purchasing depreciable assets of course at one time involved the outflow of cash, but for purposes of reporting now, it does not. |
| johntan1979 | Under the indirect method, depreciation is added back to net income, so how does it reduce net income? |
| SKIA | Johntan1979 -- It is "added back" because depreciation is an expense that is non-cash. It is simply an allocation made with no cash movement (accounting entry). Therefore, it does inherently reduce income as an expense; however, it does not reduce cash as explained above. |
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Learning Outcome Statements
describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data
CFA® 2025 Level I Curriculum, Volume 2, Module 4.