In a cash flow statement, how is the increase in depreciation reflected?

In a cash flow statement, an increase in depreciation is reflected as an increase in operating cash flow. Depreciation is a non-cash expense that reduces net income on the income statement, but since it does not involve an actual outflow of cash, it is added back to net income when calculating cash flow from operating activities.

This adjustment is necessary because while depreciation decreases taxable income and, consequently, reflects an expense on financial statements, it does not impact cash availability. By adding it back, the cash flow statement presents a clearer picture of cash generated from operations, which is crucial for assessing a company’s liquidity and operational efficiency.

In summary, recognizing an increase in depreciation results in an adjustment that boosts the operating cash flow, reflecting the true cash earnings of the business without the distortion of accounting conventions.