How does a decrease in depreciation expense affect operating cash flow calculations?

Operating cash flow is calculated by adjusting net income for non-cash expenses and changes in working capital. Depreciation is a non-cash expense that reduces net income, but it does not impact cash flow because it does not involve an outlay of cash during the period being reported.

When depreciation expense decreases, it results in an increase in net income, assuming all other factors remain constant. However, since depreciation is added back to net income when calculating operating cash flow (as it’s a non-cash charge), a reduction in depreciation means there is a lesser amount added back. Consequently, this leads to a decrease in operating cash flow when compared with previous calculations that had a higher depreciation expense.

This relationship signifies that the adjustment of operating cash flows for depreciation is crucial: a decrease in depreciation implies less non-cash expense is returned to cash flow calculations, structuring the overall cash flow lower. Therefore, the correct understanding is that a decrease in depreciation expense directly decreases the operating cash flow due to the mechanics of the cash flow calculation.