Q14-7RQ - Horngren'S Financial And Managerial Accounting

Question

Question: Explain why depreciation expense, depletion expense, and amortization expense are added to net income in the operating activities section of the statement of cash flows when using the indirect method.

 

Step-by-Step Solution

Answer

Answer

 

Depreciation expense, depletion expense, and amortization expense are added to net income to get net cash flow from operating activities.

Step 1: Depreciation expense, depletion expense, and amortization expense

Depreciation, depletion, and amortization are the non-cash expenses that are debited to the statement of profit and loss account.

Step 2: Reasons, why depreciation expense, depletion expense, and amortization expense are added to net income in the operating expenses

Depreciation, depletion, and amortization are the non-cash expenses and the cash flow statement only records cash transactions except few exceptions therefore, these expenses are added to the net income in the operating expenses. The cash transactions related to these expenses are recorded in the balance sheet.