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SSC Audit Tax Finance P-II QUESTION #6203
Question 1
How does 'Depreciation' impact a firm's cash flow?
  • It reduces cash flow because it is an expense.
  • It has no impact since it is a non-cash item.
  • It increases cash flow by reducing taxable income (tax shield).✔️
  • It increases the amount of dividends paid.
Correct Answer Explanation
By reducing taxable income, it lowers the tax bill, which is a cash outflow [cite: 21, 22].