Ace That Finance Tech Interview 2025 – Gear Up for Success!

Using the straight-line depreciation method impacts a company’s cash flow in a specific manner. When a company adopts this method, it spreads the cost of an asset evenly over its useful life, which results in a consistent, predictable expense on the income statement each year.

This depreciation reduces taxable income, which can lead to a tax shield. However, it does not directly affect cash flow, because cash flow is concerned with actual cash movements, while depreciation is a non-cash expense. Therefore, while the expense is recognized gradually over the life of the asset, it does not change the total cash flow available to the company throughout the accounting period.

The correct perspective is that cash flow, on a cash basis, remains unchanged immediately due to this depreciation method. However, since the answer proposed suggests that cash flow is recognized gradually over the years, it incorrectly implies a direct impact on cash flow, which is not the case. Actual cash inflow and outflow are unaffected by how depreciation is accounted for. Regarding the other answer options, while cash flow does not increase or decrease purely due to the accounting treatment of depreciation, recognizing that it is an ongoing non-cash expense does align with the method's gradual recognition.