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

Answer: (C)

reduces tax liability

Depreciation is a non-cash item, but to know the profitability of the organisation, it is charged to profit & loss account.

Due to charge of depreciation, organisation gets the tax benefit.

Therefore, such tax saved is considered as a cash inflow as it reduces the tax expenses by creating a charge against taxable income.