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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

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

Introduction:

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.

Explanation

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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