Certified Management Accountant 2026 – 400 Free Practice Questions to Pass the Exam

The tax savings from depreciation deductions relate to annual net cash flows because these savings effectively reduce the amount of tax a company needs to pay, thereby increasing the cash available to the business. When depreciation is deducted as an expense, it lowers taxable income. The resulting tax shield (the reduction in tax liability due to the expense) represents real cash savings that contribute positively to net cash flows.

By considering tax savings from depreciation as included in after-tax cash collections, it illustrates how these savings enhance a company's liquidity and provide additional resources for operations or investments. Every dollar saved on taxes due to depreciation can be viewed as a dollar that adds to the company’s cash flow, increasing the overall financial health and operational capacity.

Other options do not accurately reflect this relationship. For example, depreciation does not count as an operating expense in a way that impacts cash flow directly, as it is a non-cash charge. Similarly, it does not reduce cash inflow from operations because it represents a cost that provides a benefit in terms of cash savings. Finally, excluding tax benefits from depreciation in cash flow calculations would inaccurately portray the financial situation of the business, overlooking a significant area of cost savings that affects net cash flow positively.