Question & Answer: d for when using the indirect method of the Cash Flow Statement……

Depreciation is an accrual accounting entry that does not affect the cash account so it needs to be adjusted for when using the indirect method of the Cash Flow Statement.

True

False

Expert Answer

 

Answer : True

Because,

When the indirect method is used, the first section of the cash flow statement, Cash Flows from Operating Activities,begins with the company’s net income (which is the bottom line of the income statement). Since the net income was computed using the accrual method of accounting, it needs to be adjusted in order to reflect the cash received and paid.

The very first adjustment involves depreciation. The amount of Depreciation Expense reported on the income statement had reduced the company’s net income, but the depreciation entry did not involve cash. (The journal entry for the current period’s depreciation was a debit to Depreciation Expense and a credit to Accumulated Depreciation. Cash was not used.) Since the depreciation expense reduced net income, but did not use any cash, the amount of depreciation expense is added back to the net income amount.

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