When depreciation expense increases by $10, how is the impact reflected in the Cash Flow Statement?

In the context of how depreciation affects the financial statements, the correct choice illustrates that an increase in depreciation expense leads to a decrease in net income, which is a typical response in an accrual accounting framework. When depreciation expense increases by $10, it reduces net income by that same amount since depreciation is an expense that reduces taxable income.

However, the key to understanding the impact on the Cash Flow Statement lies in how cash flows are reconciled from net income. Since depreciation is a non-cash expense, it does not involve an actual cash outflow in the period; therefore, while net income decreases, it does not affect cash flow from operations directly. In the reconciliation of net income to cash flows, we add back any non-cash expenses, which in this case is the $10 depreciation.

While net income decreases by $10, cash flow from operations reflects this non-cash expense by increasing by the same amount when added back. Therefore, while the net income decrease is acknowledged, the cash flow from operations experiences a net increase, balancing the equation.

This helps in understanding the flow of information through financial statements, particularly how non-cash expenses like depreciation affect cash flows despite reducing net income on the income statement. Thus, the net income