Which of the following statements best describes the reason Depreciation Expense is added to net income when preparing the statement of cash flows?
A)Depreciation expense originally reduced net income,but it actually represents a cash inflow for the company.
B)Depreciation expense originally reduced net income,but the expense does not involve paying cash.
C)Depreciation expense originally reduced net income,but it actually represents a cash outflow for the company.
D)Depreciation expense is not included in net income and,so,its cash effect must be accounted for separately.

Question

Quizplus · Accepted Answer

When initially recording depreciation in the accounting system,we increase Depreciation Expense (with a debit)and increase Accumulated Depreciation (with a credit).Notice that depreciation does not involve cash.To eliminate the effect of having deducted Depreciation Expense in the income statement,we add it back in the statement of cash flows.

Which of the Following Statements Best Describes the Reason Depreciation