Since depreciation expense reduces net income,companies will add depreciation expense back to net income as a step in arriving at net cash flows from operations under the indirect method.

Question

Quizplus · Accepted Answer

This statement is true. Depreciation expense is a non-cash expense that represents the allocation of the cost of a long-term asset over its estimated useful life. It reduces net income according to the matching principle of accounting, but does not involve an actual outflow of cash. Therefore, it is added back to net income in the operating section of the cash flow statement prepared under the indirect method, in order to adjust for changes in non-cash working capital items and to arrive at net cash flows from operations.

Since Depreciation Expense Reduces Net Income,companies Will Add Depreciation Expense