Final answer:
Depreciation is an annual non-cash charge against income, reflecting the estimated cost of usage of capital equipment. In cash flow statements, depreciation is added back to net income because it is a non-cash expense and affects the calculation of NNP in economic measures.
Step-by-step explanation:
The statement that depreciation is an annual charge against income that reflects the estimated dollar cost of capital equipment used up but doesn't represent an actual cash outlay is true. However, the statement that net income is not adjusted by depreciation in the statement of cash flows is false. Depreciation is added back to the net income in the operating activities section of the statement of cash flows, because it is a non-cash expense that had previously reduced net income.
Depreciation is indeed a process by which capital ages and loses value over time. For instance, in accounting for GNP (Gross National Product), we subtract depreciation to get to Net National Product (NNP), which is a measure of the value of all goods and services produced by a country's residents, after accounting for the wear and tear on physical capital like machinery, buildings, and equipment. It's also reflected in the calculation of national income and personal income.