Lincoln Restaurants reported net income in 2019 of $45.9 million and depreciation expense of $48.8 million.It also reported additions to property and equipment of $162.9 million.Using the indirect method of preparing the statement of cash flows,how will these items impact the 2019 statement of cash flows?

Question

Quizplus · Accepted Answer

Under the indirect method of preparing the statement of cash flows, depreciation expense is added back to net income under operating activities since it is a non-cash expense. Therefore, depreciation of $48.8 million would be added to net income under operating activities.

Additions to property and equipment are classified as investing activities since they represent capital expenditures. Therefore, the $162.9 million would be deducted under investing activities since it represents cash outflows for the purchase of property and equipment.

Choice B is incorrect since depreciation should be added back to net income under operating activities, not deducted.

Choice A is incorrect since the $162.9 million addition to property and equipment should be added under investing activities, not deducted.

Choice D is incorrect since both depreciation and the addition to property and equipment should not be deducted under investing activities.

Lincoln Restaurants Reported Net Income in 2019 of $45