Why Does Depreciation Have an Indirect Effect on Cash Flows

question 69

Multiple Choice

Why does depreciation have an indirect effect on cash flows?

• A)It reduces the amount of income taxes a company must pay.
• B)It reduces the original cash outflow associated with the asset.
• C)It reduces the annual operating cash flows.
• D)It causes net income to be less than operating cash flows.

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Definitions:

Changes in Outputs

Variations in the quantity or quality of a company's production or services over a given period.

Contribution Margin Ratio

A financial metric that shows the percentage of sales revenue that exceeds variable costs, indicating how much revenue contributes to fixed costs and profit.

Break-Even Point

The point where total costs and total revenues are equal, leading to no profit or loss from production or sales.

Fixed Costs

Costs such as rent, salaries, and insurance are invariant, unaffected by the quantity of production or sales.