There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below.
Assertion (A): Depreciation is added to net profit before tax while preparing the cash flow statement.
Reason (R): Depreciation is a non-cash item of expense.
Answer & explanation
Correct answer: option 1
* Assertion (A) is true because, in the cash flow statement, depreciation is added back to net profit before tax. This is done because depreciation is a non-cash expense, meaning it represents the allocation of the cost of an asset over its useful life and does not involve an actual outflow of cash.
* Reason (R) is the correct explanation of Assertion (A). Depreciation is indeed a non-cash item of expense. Since the cash flow statement aims to show the actual cash inflows and outflows during a period, non-cash expenses like depreciation are added back to net profit before tax to reconcile net income with cash generated from operating activities.