Which of the following statements best explains the correct handling of depreciation on the statement of cash flows when using the indirect method?
A)Depreciation is subtracted from net income because it causes a loss when the related plant asset is sold.
B)Depreciation expense is a noncash expense that was subtracted to derive the accrual-basis net income, hence added to net income in the cash flows from operating activities section.
C)Depreciation is subtracted in the cash flows from investing activities section because it reduces the book value of the corresponding plant asset.
D)Depreciation adds to the company's cash account to help pay for new equipment.

Question

Quizplus · Accepted Answer

Depreciation expense is added back to net income in the operating activities section of the statement of cash flows when using the indirect method because it is a noncash expense that was subtracted to arrive at net income. This adjustment helps to reconcile net income to net cash provided by operating activities.

Which of the Following Statements Best Explains the Correct Handling