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

Question

Quizplus · Accepted Answer

Depreciation expense is a noncash expense that needs to be added back to net income under the indirect method. This is because it is a noncash expense that reduces net income, but does not affect actual cash flows. Therefore, the proper disposition of depreciation expense is to add it back to net income in order to arrive at operating cash flow.

When Using the Indirect Method to Complete the Cash Flows