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Eduncle posted an MCQ
October 18, 2019 • 15:46 pm 0 points
  • UGC NET
  • Management

Depreciation charged on fixed assets in the Funds Flow Statement is/are

Depreciation charged on fixed assets in the Funds Flow Statement is/are (a) Source of funds (b) An application of funds (c) Sources of funds in limited sense (d) Added back to the operating profit to find out funds from operations Which one of the following options is correct ?

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    Eduncle Best Answer

    Because we begin preparing the statement of cash flows using the net income figure taken from the income statement, we need to adjust the net income figure so that it is not reduced by Depreciation Expense. To do this, we add back the amount of the Depreciation Expense.
    Depreciation may be regarded as the capital cost of an assets allocated over the life of the asset. In simple language, it means the gradual decrease in the value of an asset due to wear and tear, use and passage of time. In real sense, depreciation is simply a book entry having the effect of reducing the book value of the asset and the profits of the current year for the same amount.
    It does not affect current assets or current liabilities and does not result in the flow of funds or to say more precisely it is a non-fund item. Hence, although depreciation is an operating cost there is no actual outflow of cash and so the amount of the depreciation charged during the year is added back to profits while finding funds from operations. But, then, is depreciation a source of funds?
    There cannot be any definite answer in 'yes' or 'no' to this question as there are differences of opinion on this important point. But it can be said with certainty that depreciation, directly at least does not amount to a source of funds. However, under certain circumstances, depreciation helps a business concern to affect savings in payment of tax and dividends and amounts to withholding a part of the funds generated through normal trading operations. It is in this sense that depreciation can be regarded as an indirect source of funds.

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