CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

In the statement of cash flows prepared under the indirect method, depreciation expense is treated as an adjustment to net income because it ______

A. reduces net income but does not involve an outflow of cash.
B. generally represents a small part of operating expenses.
C. is an inflow of cash used to replace aging plant assets.
Correct Answer: A

Depreciation is a non-cash expense that reduces net income.

User Contributed Comments 4

User Comment
mirfanrana depreciation is a non cash expense which reduces net income.
Murrayman Reduces net income but does not involve an outflow of cash... in the period in which you are reporting. Purchasing depreciable assets of course at one time involved the outflow of cash, but for purposes of reporting now, it does not.
johntan1979 Under the indirect method, depreciation is added back to net income, so how does it reduce net income?
SKIA Johntan1979 -- It is "added back" because depreciation is an expense that is non-cash. It is simply an allocation made with no cash movement (accounting entry). Therefore, it does inherently reduce income as an expense; however, it does not reduce cash as explained above.
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