Breaking into Wall Street 400 Practice Test 2026 – The Complete Guide to Master Finance Exams!

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Depreciation is a non-cash expense. Which statement best describes its effect on the cash flow statement?

Depreciation increases cash by its amount because it is a non-cash expense.

Depreciation decreases cash because it reduces net income.

Depreciation reduces pretax income on the income statement and, because it is a non-cash expense, increases cash flow from operations in the reconciliation.

Depreciation is a non-cash expense that reduces taxable income, creating a tax shield. Because it is non-cash, it doesn’t pull cash out of the business directly, but when you reconcile net income to cash from operations, you add depreciation back to reflect that no cash was actually spent. So depreciation lowers pretax income on the income statement, reducing taxes paid, and in the cash flow statement’s indirect method, this non-cash expense is added back to net income, increasing cash flow from operations.

Depreciation has no effect on the income statement or cash flow statement.