Why is depreciation added to net income in the Operating Activities category of

Question

Why is depreciation added to net income in the Operating Activities category of the statement of cash flows when the indirect method is used? Depreciation provides cash and therefore must be added to net income. Depreciation was deducted in arriving at net income on the accrual basis of accounting; however, it did not require the use of cash. Depreciation expense is a negative amount in the Investing Activities section and therefore is a positive amount in the Operating Activities section. Depreciation reduced the book value of plant assets and, therefore, must be reported as an investing activity.

Explanation / Answer

Depreciation was deducted in arriving at net income on the accrual basis of accounting; however, it did not require the use of cash.

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