Question

Lincoln Restaurants reported net income in 2019 of $45.9 million and depreciation expense of $48.8 million. It also reported additions to property and equipment of $162.9 million. Using the indirect method of preparing the statement of cash flows, how will these items impact the 2019 statement of cash flows

Answer 1

The effect these items will have on the statement is that:

• The $48.8 million is added to Net income under Operating activities
• The $162.9 million is deducted from Investing Activities

Operating activities includes the transactions the business engages in. Depreciation falls here and because it is a non-cash expense, it is added back to the net income.

Investing activities include fixed assets and their acquisition so the purchase of new property and equipment will fall here. It is a deduction because the company is spending money to get these assets.

In conclusion, depreciation is added, property and equipment are subtracted.

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