On a statement of cash flows that uses the indirect approach, calculation of cash flow from operations treats depreciation as an adjustment to reported net income because
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A. B. C. D.C
Depreciation is an expense that reduces net income, but it is a non-cash item.
In a statement of cash flows that uses the indirect approach, the calculation of cash flow from operations treats depreciation as an adjustment to reported net income because:
C. depreciation reduces net income but does not involve an outflow of cash.
The statement of cash flows is divided into three main sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. The purpose of the statement of cash flows is to provide information about the cash generated or used by a company during a specific period.
Depreciation is an accounting concept that allows companies to allocate the cost of an asset over its useful life. It is a non-cash expense that reflects the gradual wear and tear, obsolescence, or loss of value of an asset over time. Although depreciation reduces net income, it does not involve an actual outflow of cash.
The indirect method of preparing the statement of cash flows starts with the reported net income from the income statement. It then makes adjustments to convert the accrual-based net income to the cash-based net income. One of these adjustments is to add back the depreciation expense to net income.
The reason for adding back depreciation is to remove the non-cash component of net income. Since depreciation is not an actual cash outflow, it does not affect the cash position of the company. By adding back depreciation, the statement of cash flows adjusts net income to reflect the actual cash generated or used by the company's operations.
Therefore, the correct answer is C. depreciation reduces net income but does not involve an outflow of cash.