What Influence Depreciation Put On Cash Flow Statement?

Discussion in 'General Trading Discussion' started by Advisorymandi, Jul 28, 2018.

  1. Advisorymandi

    Advisorymandi Member

    Mar 2018
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    Whether you are a small business owner or a big business owner, you must be aware of the long-lived assets over time also referred to as “Fixed-Assets”. These are the tangible assets which are purchased for long-term use and are not likely to be converted into cash such as equipment, buildings, and land etc.

    You must be wondering why we are talking about fixed assets and what does that have to do with the cash flow statement. Well, let’s assume you are a small manufacturer who bought a machine in thinking it will last 10 years. In a simple analysis, you take 1/10 of the cost each year. Since it is a tangible asset which is going to benefit you over a long time; you’re not going to write off the machine in the first year.

    So, what then?

    Well, in that case, you will record depreciation expense. So, what you gonna do next?

    The answer is, a Double-sided entry.

    One side where the value of the machine reduces by 10 percent in each year and the other side show an expense on the income statement. But, while making the entries, you eventually realized that expenses don’t match and most importantly, what happened with the cash?

    Because in year one, all the money (cash) to buy the machine. Thus, in year one, we gotta mention under the section “investing” that we spent money to buy the machine. Which by the way, reduces the cash flow. But, in subsequent years, we have this expense, depreciation, which doesn’t involve the expenditure of cash.

    That’s why we have to add it back to the net income as a “noncash expense” to get closer to what the cash flow actually was.

    To get more information on cash flow, visit advisorymandi.com.

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