Why are depreciation and amortization added back to net income on the cash flow statement?

• A. They are non-cash expenses
• B. They are cash expenses
• C. They represent financing activities
• D. They directly reduce taxes

Answer: (A)

Depreciation and amortization are non-cash charges that reduce net income but don’t involve any actual cash outlay in the period. On the cash flow statement, using the indirect method, you start with net income and add back these non-cash expenses to reconcile to cash from operations. By doing so, you reflect the true cash generated by the business, since the accounting Expense reduced earnings without taking cash out. Their tax effects are real but are already captured in the tax line of net income, so the adjustment focuses on reversing the non-cash nature of these charges. They aren’t cash expenses or financing activities, so the correct reason is that they are non-cash expenses.