Asked by Megan kibby on Jun 29, 2024
Verified
During 2019,the Bowtie Company reported net income of $1,872 million,depreciation expense of $1,412 million and $978 million paid for purchases of property,plant,and equipment.Using the indirect method of preparing the statement of cash flows,what would be the effect on cash flows from operating activities during 2019?
A) Cash flows from operating activities would be increased by depreciation expense and decreased by the property,plant,and equipment purchases.
B) Cash flow from operating activities would be increased by depreciation expense and by the property,plant,and equipment purchases.
C) Cash flow from operating activities would be increased by depreciation expense but the property,plant,and equipment purchases would have no effect on cash flow from operating activities.
D) Depreciation is a noncash expense and would not be used to calculate cash flow from operating activities.
Indirect Method
A way of preparing the cash flow statement where net income is adjusted for non-cash transactions, indirect expenses, and changes in working capital.
Depreciation Expense
A technique in accounting that involves spreading out the expense of a physical asset over its expected lifespan.
- Acknowledge the implications for financial statements due to the omission of amortization or depreciation expenses.
Verified Answer
TM
Taylor ManningJun 30, 2024
Final Answer :
C
Explanation :
Depreciation expense is added back to net income in the indirect method of calculating cash flows from operating activities because it is a non-cash expense. Purchases of property, plant, and equipment are considered investing activities, not operating activities, and thus do not affect the cash flow from operating activities in the indirect method.
Learning Objectives
- Acknowledge the implications for financial statements due to the omission of amortization or depreciation expenses.