To calculate the cash produced by the business it is necessary to add back the depreciation charge and to subtract the expenditure on new capital equipment.

Question

Quizplus · Accepted Answer

Depreciation is a non-cash expense that reduces the net income of a business. However, it does not involve any actual outflow of cash. Therefore, to calculate the cash produced by the business, we need to add back the depreciation charge. On the other hand, the expenditure on new capital equipment involves an actual cash outflow, and therefore, to calculate the cash produced by the business, we need to subtract this expenditure.

To Calculate the Cash Produced by the Business It Is