Final answer:
The correct answer is 'a) Depreciation reduces income and taxes', because depreciation is an expense that reduces taxable income and, consequently, the taxes a company owes, indirectly increasing investment cash flows.
Step-by-step explanation:
The relationship between depreciation, income, taxes, and investment cash flows can be summarized as follows: Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. From an accounting perspective, depreciation reduces taxable income because it is considered a non-cash expense. When the taxable income of a business is reduced, the amount of taxes owed also typically decreases. Therefore, depreciation indirectly increases cash flow from investments because the company retains more of its earnings after tax due to the lower taxable income.
Accordingly, the correct answer to the question 'Which of the following correctly describes the relationship between depreciation, income, taxes, and investment cash flows?' is a) Depreciation reduces income and taxes. This is because depreciation is accounted for as an expense, which lowers the income reported on financial statements, and in turn, lowers the amount of income subject to taxation.