Series 79 practice questionmediumFinancial Statement Analysis
Why can cash flow from operations exceed net income when a company records a large depreciation charge of $12 million?
- ADepreciation reduces net income but is added back on the cash flow statement because it is non-cash✓ Correct answer
- BDepreciation is treated as financing cash flow
- CDepreciation increases revenue recognition
- DDepreciation creates an investing cash inflow
Explanation
Why A — Depreciation reduces net income but is added back on the cash flow statement because it is non-cash
Depreciation reduces net income but is added back on the cash flow statement because it is non-cash Under the indirect method, analysts start with net income and add back non-cash expenses such as depreciation. That is why companies with large fixed asset bases often report operating cash flow above net income.
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