What do depreciation and amortization reflect regarding cash on the cash flow statement?

The correct answer highlights the role of depreciation and amortization as a source of cash when analyzing the cash flow statement. Although depreciation and amortization are accounting methods used to allocate the cost of tangible and intangible assets over their useful lives, they do not involve an actual cash outflow during the period in which they are recorded. Instead, they reduce the taxable income, leading to a lower income tax expense.

When preparing the cash flow statement using the indirect method, net income is adjusted by adding back non-cash expenses, which include depreciation and amortization. This adjustment reflects that while these expenses decrease reported earnings, they do not consume any cash during the accounting period. Consequently, adding these non-cash items back to net income enhances the cash flow from operating activities, effectively indicating they are treated as a source of cash in this context.

Understanding this principle is crucial for interpreting how non-cash transactions impact the cash flow statement, and recognizing the differences between cash flows associated with operations versus those that are mere accounting entries.