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Under the indirect method, how is depreciation expense treated in the operating activities section?
AReported as an investing outflow
BSubtracted from net income
CAdded back to net income
DExcluded from the statement entirely
Answer & Solution
Correct answer: C. Added back to net income
1. The indirect method adjusts net income to remove non-cash expenses.
2. Depreciation is a non-cash expense that reduced net income but used no cash.
3. Therefore it is added back to net income.
4. It is not an investing outflow (no cash moved) and is not excluded.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §7.2.3 "Operating activities section (indirect method)", p.271_
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