What is the effect on Cash Flow from Operations after recording Net Income with depreciation added back?

• A. Decreases by $2
• B. Increases by $2
• C. Remains unchanged
• D. Increases by $12

Answer: (A)

When considering the effects of net income and depreciation on Cash Flow from Operations, it's important to recognize that depreciation is a non-cash expense. This means that while it reduces reported net income on the income statement, it does not actually impact the cash that a company has on hand.

When recording net income, you would typically start from that figure to calculate Cash Flow from Operations. To adjust for the non-cash expense of depreciation, you add back the amount of depreciation to net income because it effectively reduces tax liability but does not involve an outflow of cash. Therefore, if net income is, for example, $10 and depreciation is $2, the resulting Cash Flow from Operations would increase from $10 to $12 after adding back the $2 of depreciation.

Given this, the correct option that reflects the increase in cash flow due to the adjustment for depreciation is an increase of $2. The reasoning behind other choices might stem from misinterpretation of how depreciation affects cash flow, but recognizing that it adds back to cash flow highlights that Cash Flow from Operations actually increases, not decreases or remains unchanged.