Which of the following statements is CORRECT? A. The more depreciation a firm re

Question

Which of the following statements is CORRECT?

A. The more depreciation a firm reports, the higher its tax bill, other things held constant.

B. People sometimes talk about the firm s cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line.

C. Depreciation reduces a firm s cash balance, so an increase in depreciation would normally lead to a reduction in the firm s cash flow.

D. Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes.

E. Depreciation is not a cash charge, so it does not have an effect on a firm s reported profits.

A. The more depreciation a firm reports, the higher its tax bill, other things held constant.

B. People sometimes talk about the firm s cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line.

C. Depreciation reduces a firm s cash balance, so an increase in depreciation would normally lead to a reduction in the firm s cash flow.

D. Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes.

E. Depreciation is not a cash charge, so it does not have an effect on a firm s reported profits.

Explanation / Answer

D. Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes.

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