Which of the following statements is CORRECT?
A) Depreciation and amortization are not cash charges, so neither of them has an effect on a firm's reported profits.
B) The more depreciation a firm reports, the higher its tax bill, other things held constant.
C) People sometimes talk about the firm's net cash provided (used) by operations, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line."
D) Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's net cash flow.
E) Net cash provided (used) by operations is often defined as follows:
Net cash flow provided (used) by operations = Net Income + Noncash Adjustments + Working Capital Adjustments.

Question

Quizplus · Accepted Answer

Depreciation and amortization are non-cash charges that do not directly affect cash flow but are added back to net income in the calculation of net cash provided by operations. This is because they reduce taxable income, thus affecting taxes paid and indirectly influencing cash flow. The correct statement, E, accurately describes how net cash provided (used) by operations is calculated, including noncash adjustments like depreciation and amortization, and adjustments for changes in working capital.

Which of the Following Statements Is CORRECT