Practice prompt · Q:transactions-to-statements/depreciation-addback-001

Interpret an offsetting depreciation addback

Formative check on why an indirect depreciation adjustment neither reverses expense nor creates Cash when another adjustment offsets it.

Updated Aug 6, 2026 Review due Nov 6, 2026

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Northstar reports $8,000 net income after $2,000 depreciation expense. Accounts Receivable increases $2,000, and no other reconciliation items apply. Direct operating cash evidence also reports $8,000. Which explanation is correct?

Choose the best answer. A The $2,000 addback reverses depreciation expense, so net income should be restated to $10,000. B Depreciation supplies $2,000 Cash, while the receivable uses $2,000 Cash, so the two cash transactions offset. C Operating cash flow is $8,000: add $2,000 to remove depreciation's noncash income effect and subtract the $2,000 receivable increase; neither adjustment reverses the underlying accounting. D No reconciliation is needed because equal net income and operating cash flow prove that every revenue and expense was received or paid in Cash.

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Answer: C

The bridge is $8,000 net income plus $2,000 depreciation minus the $2,000 Accounts Receivable increase, equaling $8,000 operating cash flow. Choice C is correct. The addback removes a noncash income effect from the bridge; it does not erase expense, create Cash, or make the asset economically free.