A depreciation expense is added back to accounting profit when preparing cash flow from operations under the indirect method because depreciation:
Correct answer: B. Is a non-cash expense
- A. Increases sales revenue
- B. Is a non-cash expense
- C. Creates a financing inflow
- D. Reduces current liabilities
Explanation
Depreciation reduces reported profit but does not involve a current cash payment. It is therefore added back when converting accounting profit into operating cash flow.
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About Business Finance
Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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