What is the effect of Depreciation on the Cash Flow Statement?

Depreciation is a non-cash expense that reduces the value of a company's fixed assets over time, reflecting wear and tear or obsolescence. On the Cash Flow Statement, which focuses on cash inflows and outflows over a specified period, depreciation is added back to cash flow from operating activities.

This adjustment occurs because while depreciation decreases net income, it does not involve an actual cash transaction. Therefore, when calculating cash flow from operations, adding back depreciation ensures that the analysis reflects the actual cash generated by the business. It essentially neutralizes the effect of the non-cash expense on net income, providing a clearer picture of the company's cash-generating ability.

In contrast, the other options misrepresent the nature of depreciation's impact on cash flow.