Which statement about depreciation in cash flow analysis is correct?

Which statement about depreciation in cash flow analysis is correct?

• A. It reduces cash in CFO.
• B. It has no effect on cash in any statement.
• C. It is added back to net income in CFO.
• D. It increases cash flow from investing.

Answer: (C)

Depreciation is a non-cash expense that lowers reported net income without using actual cash in the period. When you reconcile net income to cash flow from operations, you add back non-cash charges like depreciation because they reduced income but didn’t reduce cash. That makes depreciation being added back to net income in the cash flow from operations the correct statement. It doesn’t reduce cash in CFO, since it’s non-cash; it doesn’t directly increase cash flow from investing (that section reflects actual asset purchases and sales, not non-cash charges); and while depreciation lowers taxes, its cash impact is captured through the tax shield and CFO adjustments, not as a direct cash inflow in investing.

Depreciation is a non-cash expense that lowers reported net income without using actual cash in the period. When you reconcile net income to cash flow from operations, you add back non-cash charges like depreciation because they reduced income but didn’t reduce cash. That makes depreciation being added back to net income in the cash flow from operations the correct statement. It doesn’t reduce cash in CFO, since it’s non-cash; it doesn’t directly increase cash flow from investing (that section reflects actual asset purchases and sales, not non-cash charges); and while depreciation lowers taxes, its cash impact is captured through the tax shield and CFO adjustments, not as a direct cash inflow in investing.