Question

With the indirect method for determining net cash flows from operations, depreciation is: a. subtracted from net income. b. subtracted from working capital. c. ignored because it does not provide or use cash. d. added to net income.

Answer 1

Answer: Depreciation is added to net income

Explanation: Net income is derived from the income statement after expenses has been deducted from income.

In arriving at net cash flow from operations using indirect method the net income is used and non cash items adjusted for. Some of these non cash item sold are depreciation, gains on sale of equipment, amortization and so on.

Since depreciation is a reduction in assets over a period due to wear and tear. It was initially deducted from net income on the income statement. As such, it will be added to net income to arrive at net cash flow from operations.