Question

Depreciation is incorporated in cash flows because it _____________.

• A. is unavoidable cost
• B. is a cash flow
• C. reduces tax liability
• D. involves an outflow

Answer 1

The correct option is C reduces tax liability

The result is a higher amount of cash on the cash flow statement because depreciation is added back into the operating cash flow. Cash must be paid to buy the asset before depreciation begins. While this is merely an asset transfer from cash to a fixed asset on the balance sheet, cash flow from investing must be used.