Depreciation expense is a non-cash charge. Which statement best describes its effect on net income and cash flow in the period recognized?

• A. Depreciation reduces cash flow in the period it is recognized.
• B. Depreciation reduces net income but does not affect cash flow from operations in the period it is recognized.
• C. Depreciation increases cash flow in the period recognized.
• D. Depreciation has no impact on net income or cash flow.

Answer: (B)

Depreciation is a non-cash expense, so it lowers the income statement’s net income because it is charged against revenue. However, no cash leaves the company when depreciation is recorded, so the actual cash provided by or used in operations in that period is not reduced by the depreciation charge. (If you summarize cash flow from operations using the indirect method, you would adjust net income by adding back depreciation to reflect its non-cash nature, but the period’s cash receipts and payments aren’t affected by the depreciation itself.)