The Statement of Cash Flows (Indirect Method) Reports Depreciation Expense

question 44

Multiple Choice

The statement of cash flows (indirect method) reports depreciation expense as an addition to profit because depreciation does which of the following?

• A) Causes an inflow of funds for the replacement of assets.
• B) Is a direct use of cash.
• C) Reduces reported profit of the period but does not involve an outflow of cash for that period.
• D) Reduces reported profit and causes an inflow of cash.

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Definitions:

Absorption Costing

This accounting technique aggregates the total manufacturing costs—direct materials, direct labor, and both variable and fixed overheads—into the calculation of a product’s price.

Cost-plus Pricing

A pricing strategy where a fixed percentage or a fixed amount is added to the cost price to determine the selling price.

Return on Investment

A measure used to evaluate the efficiency or profitability of an investment, calculated as the net profit divided by the cost of investment.

Markup

The amount added to the cost of a product to cover expenses and generate profit, often expressed as a percentage of the cost.