Which of the Following Statements Best Explains the Correct Handling

question 121

Multiple Choice

Which of the following statements best explains the correct handling of depreciation on the statement of cash flows when using the indirect method?

• A)Depreciation expense is a noncash expense that is added to net income to derive cash flows from operating activities.
• B)Depreciationexpense is subtracted in the cash flows from investing activities section because it reduces the book value of the corresponding plant asset.
• C)Depreciationexpense is subtracted from net income because it causes a loss when the related plant asset is sold.
• D)Depreciationexpense adds to the company's Cash account to help pay for new equipment.

---

Definitions:

Earnings Rate

The return on an investment or the amount of profit made compared to the amount of money invested.

Internal Rate of Return

An investment’s projected rate of return, calculated by finding the discount rate that sets the net present value of all cash flows (both positive and negative) to zero.

Present Value

Present value is the current worth of a future sum of money or stream of cash flows, given a specified rate of return, adjusting for the time value of money.

Annuity

An annuity is a financial product that pays out a fixed stream of payments to an individual, typically used as an income stream for retirees.