Question

Why do we subtract depreciation and add it back?

a) "To reduce tax liability"
b) "To account for changes in asset value"
c) "To calculate total expenditure"
d) "To maintain consistent book value"

Answer 1

Depreciation is subtracted and added back for several reasons: to reduce tax liability and to maintain consistent book value.

Step-by-step explanation:

Depreciation is subtracted and added back for multiple reasons. One reason is to reduce tax liability. By subtracting depreciation, a company can lower its taxable income, which in turn reduces the amount of taxes owed. Another reason is to maintain consistent book value. Book value is the value of an asset as recorded in a company's accounting records. When an asset depreciates, its book value decreases. By adding back the depreciation, the company can keep the asset's book value consistent.