Question

Olsen Company prepares its statement of cash flows using the indirect method. Indicate whether the item...

Olsen Company prepares its statement of cash flows using the indirect method. Indicate whether the item would be added to net income (increase), deducted from net income (decrease), or has no effect on net income to determine net cash flows from operating activities. Depreciation expense, which is included on the income statement.

None of the options listed

All of the options listed

Decrease

Increase

No effect

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Answer #1

Answer:

Depreciation is a non cash item which are considered for the determination of net income in the income statement of any entity. Depreciation expense are reduced the carrying value of assets & also helps in saving the tax liability as depreciation is allowable expenses.

While preparing the cash flow using the indirect method, entity should added back the depreciation expense to net income as it is a non cash item which results in reduced net income.

Therefore, Olsen Company should be add back the depreciation expense to net income to determine the net cash flow from operating activities under indirect method of cash flow statement.

Therefore, Option (d) i.e. "Increase" is the correct answer.

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