In the indirect method, how is depreciation expense treated?

• A. Depreciation expense is subtracted from net income.
• B. Depreciation expense is ignored.
• C. Depreciation expense is added to net income in the operating activities section.
• D. Depreciation expense is treated as an investing outflow.

Answer: (C)

Depreciation is a non-cash expense. In the indirect method, you start with net income and adjust for items that affected reported income but didn’t involve cash during the period. Because depreciation reduced net income without using cash, you add it back when reconciling to cash flow from operating activities. This increases the cash flow figure, reflecting the actual cash generated from operations. It isn’t ignored, nor is it an investing outflow.