Under the indirect method of preparing operating cash flows, depreciation expense is added back to accounting profit because depreciation
Correct answer: A. is a non-cash expense charged against profit
- A. is a non-cash expense charged against profit
- B. creates an additional cash receipt
- C. represents a financing cash inflow
- D. is recorded only when an asset is sold
Explanation
Depreciation reduces accounting profit but does not require a cash payment in the current period. It is therefore added back when converting accrual-based profit into operating cash flow.
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About Financial Statements
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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