Why is depreciation expense added to net income (indirect method) on the statement of cash flows?
Depreciation expense is a noncash expense. That is, each period when depreciation is recorded, no cash payment is made. (The cash outflow associated with depreciation occurs when the related asset is first acquired.) Since no cash payment is made for depreciation, the effect of the depreciation expense on net income needs to be reversed in the reconciliation to cash flows. Depreciation expense was originally subtracted to arrive at net income; thus, to reverse its effect, depreciation expense needs to be added back to net income on the statement of cash flows (indirect method).
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