How does depreciation primarily affect net income?

Depreciation primarily affects net income by reducing taxable income. This is because depreciation is considered an expense that accounts for the gradual wear and tear of physical assets, such as machinery or buildings, over time. When a business records depreciation expense on its income statement, it lowers the total earnings before taxes are calculated. As a result, when taxable income is reduced, the overall tax liability is also lowered, which can positively impact the company's cash flow. By effectively representing the decrease in value of its assets, depreciation allows businesses to reflect the true cost of using those assets in generating revenue, while also benefiting from tax deductions associated with those expenses.

The other options do not accurately align with the impact of depreciation on net income. For instance, while depreciation does not increase cash flow directly, it can indirectly contribute to better cash flow management through tax benefits. It is also not categorized as a non-deductible expense; rather, it is a deductible expense. Lastly, depreciation does not inflate the income statement's bottom line; instead, it accurately portrays expenses, leading to a more realistic assessment of profitability.