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:

Profit-Maximizing Price

The price level at which a company can make the highest profit, balancing between sales volume and profit margin.

Panel

A group of individuals selected to discuss, investigate, or make decisions about a particular topic, or a longitudinal statistical study in which the same subjects are observed repeatedly over a period of time.

Long-Run Equilibrium

A state in which all factors of production and outputs are variable, leading to a situation where no economic agent has the incentive to alter their behavior.

Economic Profit

The difference between total revenues and the total costs of a firm, including both explicit and implicit costs.