Question

Which of the following should be added from the net income depreciation when constructing a statement of cash flows using the indirect method?

1) Depreciation expense
2) Accumulated depreciation
3) Net income
4) Cash flows from operating activities

Answer 1

When constructing a statement of cash flows using the indirect method, depreciation expense is added back to net income.

The correct option is 1.

Step-by-step explanation:

Depreciation is a non-cash expense that reduces net income but does not involve an actual outflow of cash. Depreciation expense is a component of operating activities and is included in the adjustments made in the indirect method to convert net income to the net cash provided by operating activities.

Therefore, it needs to be added back to net income to reconcile net income with the actual cash generated by the operating activities.

So, the correct option is 1.