Is depreciation a source of fund flow?

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 Pinky asked almost 4 years ago

Is depreciation a source of fund flow?

    0       0 Answer Now Comment Report
2 Answers
Open uri20170510 32134 117xyds?1494421825 dhanashri answered almost 4 years ago

hello Some people state that depreciation is a source of funds or a source of cash. I disagree. Depreciation expense is reported as a positive amount on the statement of cash flows prepared under the popular indirect method. However, the reason it is listed is to adjust the net income amount that had been reduced by depreciation expense on the income statement. (Recall that the depreciation entry debits Depreciation Expense and credits Accumulated Depreciation—the cash account is not involved.) In other words, the positive depreciation amount reported on the statement of cash flows is merely one of the adjustments needed to convert the accrual net income to the cash provided from operating activities. Depreciation is not a source of cash. Let's illustrate this with some amounts. A sidewalk florist operates a cash only business. During the most recent year, this florist had cash revenues of $100,000. Its expenses included $70,000 of cash expenses and $8,000 of depreciation expense on its truck that was purchased in an earlier year. During the year there were no other revenues or expenses, and the florist's cash balance increased by $30,000. The florist's income statement will report net income of $22,000 (revenues of $100,000 minus expenses of $78,000). The florist's statement of cash flows prepared under the indirect method will begin with net income of $22,000. It will then add the $8,000 of depreciation expense. The result is cash provided by operating activities of $30,000—which agrees to the business's change in its cash balance. The $8,000 of depreciation expense was not a source of cash, even though it appears as a positive amount on the statement of cash flows. Editor's note: A reader's comment points out that the depreciation on the income tax return will reduce taxable income and that in turn will likely reduce the amount of cash paid for income taxes. This reduction in income taxes is a source of cash.

    1       0 Comment Report
Important Note – Preparing for CA Final?
CAKART provides Indias top faculty each subject video classes and lectures – online & in Pen Drive/ DVD – at very cost effective rates. Get video classes from Quality is much better than local tuition, so results are much better.
Watch Sample Video Now by clicking on the link(s) below – 
For any questions Request A Call Back  
Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 lochan answered almost 4 years ago

DEPRECIATION SOURCE OF FUND FLOW Hi, Depreciation is not a source of fund flow .

    0       1 Comment Report
Get Notifications
Watch best faculty demo video classes

These top faculty video lectures will
help u prepare like nothing else can.