BUSINESS ADMINISTRATION
BUSINESS ENVIRONMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A cash outflow.
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Accounting expression for the act of selling an asset.
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An income-decreasing expense that does not affect cash-flows.
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A side calculation done by auditors.
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Detailed explanation-1: -Depreciation is a type of expense that is used to reduce the carrying value of an asset. Depreciation is entered as a debit on the income statement as an expense and a credit to asset value (so actual cash flows are not exchanged).
Detailed explanation-2: -What’s the impact of depreciation on cash flow? Depreciation does not have a direct impact on cash flow. However, it does have an indirect effect on cash flow because it changes the company’s tax liabilities, which reduces cash outflows from income taxes.
Detailed explanation-3: -Depreciation is considered a non-cash expense, since it is simply an ongoing charge to the carrying amount of a fixed asset, designed to reduce the recorded cost of the asset over its useful life.
Detailed explanation-4: -Increasing Depreciation will increase expenses, thereby decreasing Net Income. Cash Flow Statement: Because Depreciation is incorporated into Net Income, it must be added back in the SCF, because it is a non-cash expense and therefore does not decrease Cash when it is expensed.