Question

How is “Depreciation Expense” separately listed in the Operations Section of the Statement of Cash Flows using the Direct and Indirect methods?

Select one:

a.

Direct	Indirect
Added	Added

b.

Direct	Indirect
Subtracted	Subtracted

c.

Direct	Indirect
Not Listed	Added

d.

Direct	Indirect
Added	Not Listed

e.

Direct	Indirect
Subtracted	Added

Answer 1

C. Direct- Not listed, Indirect-Added

1. Cash Flow using Direct Method

While preparing the Cash Flow Statement as per Direct Method, the difference between Actual Cash Receipts from Operating Revenue and Actual Cash Payment for Operating activities is the Net Cash flow from operating activities. In other words it is a Income Statement (Profit&Loss A/c) prepared on Cash Basis under the Direct Method.

Under Direct Method, items like Depreciation, Amortization of Intangible Assets, Preliminary Expenses etc are ignored since Direct Method includes only Cash Transactions and Non-cash trantransactionssactions are omitted.

Thus, No adjustment is made for depreciation under Direct Method.

2. Cash Flow under Indirect Method

The Cash Flow Statement under Indirect Method, begin with Net Income, whereas net income is arrived at after providing for depreciation. Under this method Net Income for the period is used as base and adjustment are made for Non-cash items.

Depreciation is a Non-cash item which is adjusted by means of reduction in the value of assets.

Since there is no Actual Cash Outflow on account of depreciation,it is added back to the Net Income.