Question

Using the indirect method of preparing a statement of cash flows, depreciation expense for the current year is:

a) added in the investing activities section
b) added in the financing activities section
c) subtracted in the operating activities section
d) added in the operating activities section

Answer 1

Depreciation expense for the current year is added in the operating activities section in the indirect method of preparing a statement of cash flows.

Step-by-step explanation:

In the indirect method of preparing a statement of cash flows, depreciation expense for the current year is added in the operating activities section.

The operating activities section of the statement of cash flows includes activities that relate to the main operations of the business, such as revenue, expenses, and changes in working capital. Depreciation expense is a non-cash item that is added back to net income in the operating activities section because it does not involve the actual outflow of cash.

By adding back depreciation expense, the statement of cash flows adjusts the net income figure to reflect the cash flow from operating activities more accurately.