GENERAL KNOWLEDGE

Detailed explanation-1: -What’s the impact of depreciation on cash flow? Depreciation does not have a direct impact on cash flow. However, it does have an indirect effect on cash flow because it changes the company’s tax liabilities, which reduces cash outflows from income taxes.

Detailed explanation-2: -The result is a higher amount of cash on the cash flow statement because depreciation is added back into the operating cash flow. Cash must be paid to buy the asset before depreciation begins. While this is merely an asset transfer from cash to a fixed asset on the balance sheet, cash flow from investing must be used.

Detailed explanation-3: -Why do we subtract depreciation in income statement but adding in cash flow? Because Depreciation is not a cash expense, or expenditure. The subtraction reduces Net Income because it is subtracted from Revenue in the Income Statement.

Detailed explanation-4: -Depreciation is an important concept in capital budgeting. This is because it is a non cash expense and ideally should not have any effect on the cash flows. This is the reason why it is added back during cash flow calculations.

Detailed explanation-5: -Depreciation generates the actual cash flow for the company Depreciation is an allowable expense while computing the taxable income. Hence, its presence will reduce the amount of tax liability of the company and generate the cash flow by reducing the income tax amount payable by the company.