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:

Bargaining Process

The negotiation between parties, such as unions and employers, to reach agreement on terms of employment.

Good Faith

The honest intent to act without taking an unfair advantage over another party, often required in contractual agreements.

Collective Agreement

A written contract negotiated through collective bargaining for labor between an employer and a union representing the employees.

Legal Bargaining Agent

A representative, often a union, designated to negotiate employment terms on behalf of a group of employees.