Why Is Depreciation Added to Net Income in the Operating

question 105

Multiple Choice

Why is depreciation added to net income in the Operating Activities category of the statement of cash flows when the indirect method is used?

• A)Depreciation expense is a negative amount in the Investing Activities section and therefore is a positive amount in the Operating Activities section.
• B)Depreciation provides cash and therefore must be added to net income.
• C)Depreciation was deducted in arriving at net income on the accrual basis of accounting;however,it did not require the use of cash.
• D)Depreciation reduced the book value of plant assets and,therefore,must be reported as an investing activity.

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Definitions:

Overhead Applied

The portion of overhead costs allocated to individual products or services based on an estimated or predetermined rate.

Direct Materials

Raw materials that are directly traceable to the manufacturing of a product and are considered variable costs, forming part of the inventory costs.

Raw Materials Inventory

The total cost of all component materials currently in stock that have not yet been used in work-in-process or finished goods production.

Work in Process Inventory

Work in process inventory consists of products that are in the production process but are not yet completed, representing a stage between raw materials and finished goods.