In cash flow from operations, which adjustment is considered a non-cash expense?

In cash flow from operations, which adjustment is considered a non-cash expense?

• A. Depreciation
• B. Accounts payable
• C. Inventory purchases
• D. Interest expense

Answer: (A)

Depreciation is a non-cash expense. In the cash flow from operations, we start with net income and add back items that reduced net income but didn’t actually use cash in the period. Depreciation lowers reported income by allocating the cost of a long-term asset over its useful life, but no cash is spent when the depreciation expense is recorded. So we add it back to net income to reflect real cash generated by operations. Other options involve actual cash movements. Accounts payable changes reflect timing of cash payments for obligations. Inventory purchases require cash to acquire more stock. Interest expense is a cash outflow when paid, so it isn’t treated as a non-cash adjustment in operating cash flow.

Depreciation is a non-cash expense. In the cash flow from operations, we start with net income and add back items that reduced net income but didn’t actually use cash in the period. Depreciation lowers reported income by allocating the cost of a long-term asset over its useful life, but no cash is spent when the depreciation expense is recorded. So we add it back to net income to reflect real cash generated by operations.

Other options involve actual cash movements. Accounts payable changes reflect timing of cash payments for obligations. Inventory purchases require cash to acquire more stock. Interest expense is a cash outflow when paid, so it isn’t treated as a non-cash adjustment in operating cash flow.