Why is depreciation a positive value in the Operating portion in the Cashflow statement?
http://www.tickerhound.com/questions/detail/2008031a069bdb says that depreciation is a non-cash expense which reduces a company's earnings, meaning it would be a negative value in the income statement (am i right?).
So, the reason depreciation is positive in the cashflow statement is just to offset this? So if depreciation is -1mil in the income statement, there will be a positive depreciation acccount of +1mil in the cashflow statement.
Did i got it right?
Additional Information:
http://www.tickerhound.com/questions/detail/2008031a069bdb says that depreciation is a non-cash expense which reduces a company's earnings, meaning it would be a negative value in the income statement (am i right?).
So, the reason depreciation is positive in the cashflow statement is just to offset this? So if depreciation is -1mil in the income statement, there will be a positive depreciation acccount of +1mil in the cashflow statement.
Did i got it right? If so, theoretically it's meaningless since it doesn't really add any cash to the company right?
Best Answer
2172 points
ChaosNantuko answered one year ago …
I'll simplify this even more. Lets say the companies had the following numbers...
revenues: 1000
expenses (without depreciation): 600
depreciation expense: 300
giving them a net income of : 100.
Yet they didn't actually pay money for depreciation, so their cashflow was 400 (1000-600).
Because you almost always know the net income figure, and the depreciation figure, its easier to just add the depreciation to the net income to get to the same 400 number.
So, in a word, yes. Your right, the positive depreciation number in the cashflow statement is to offset the negative depreciation in the net income.
Answers
951 points
Grudun answered one year ago …
The reason depreciation is a positive on the cashflow statement is that it is an expense that was already paid for when the item was purchased. For example you buy a car for $20,000 and the next year it is worth $17,000 if you were doing a bussiness balance sheet it would be a $3,000 expense, but you did not spend any CASH to generate that expense. So when you do you cash calculation you do is as follows:
Cash(previous statement) + Earnings(this time period) + Depreciation - Capital Expenditures = Current Cash[simplified version]
This works because the depreciation was used to reduce the earnings but did not require any cash during this time period(generally quarter) but the cash was spent in previous time periods as a Capital Expenditure.
825 points
Dragonsbane answered one year ago …
I may be saying the same thing as Grudun. But I'll try to simplify it a little. On the Income Statement, depreciation is counted as an expense even though there is no cash outlay involved. So when calculating cash flow (on the Cash Flow Statement). You add the Depreciation expense back into the Net Income because no cash was ever paid out for depreciation (during this period) even though it was counted as an expense and subracted from Income Statement.
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