Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881



Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem

Why are depreciation, depletion, and amortization added to net income when the indirect method is used to report net cash flows from operating activities?

To determine


Cash flow from operating activities calculates the inflow and outflow of cash from day-to-day activities. It includes operating income and operating expenses for the year. It can be calculated by using two methods, i.e., indirect method and direct method.

To state:

The reason depreciation, depletion and amortization are added back to find cash from operating activities using indirect method.


The Non-cash expenses such as depreciation, depletion and amortization does not reduce cash as they are non-cash expense, but they do reduce the net income as they are tax deductible expense. As a result of this, they reduce the tax cost...

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