Depreciation and amortization
Depreciation in Cash Flow Depreciation in Cash Flow
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- Let's see if we can better understand what a cash flow statement
- for my simplified shipping truck example company would actually look like.
- Now I say it's simplified because this is a very simplified income statement
- for each of these periods. I'm not really showing all the expenses
- or all of the details that you would actually have for a shipping company
- but we really just care about the accounting.
- So let'a just say that at the beginning of this fiscal year,
- when I started this company, I had $60,000.
- We know from our example that we used that $60,000
- to buy a $60,000 truck.
- And on the cash flow statement you express that saying
- "I spent $60,000 on Capital Expenditure"
- sometimes it's "property plant and equipment".
- So you would actually put the $60,000 right over here, on capital expenditures.
- and hopefully we'll understand this in a little bit
- Now remember, the cash flow statement is really a way of reconciling the profit
- with the starting and the ending cash.
- So let's just think about this a little bit.
- Our profit here, if we just take the number that we have here,
- Our profit in the first period is $30,000.
- We're assuming nothing shady is happening with the Accounts Payable,
- Accounts Receivable, that they're not changing over the course of the year.
- And then we have depreciation, and we want to think a little bit in this video,
- what does the depreciation do to the cash flow statement?
- So I'll just write down the number first.
- So we have this depreciation value. This is the truck depreciation.
- It's not just the expent value of the truck, we're spreading that cost over 3 years.
- So $20,000 over 3 years is the life of that truck.
- So the depreciation in each of these periods is $20,000.
- And what I'm going to show you here is,
- To figure out the cash from operations from actually how much cash the operations are producing.
- We want to add back this depreciation to the profit
- so our cash from operations is going to be $50,000.
- And it might not seem obvious to you at first, but I want you to think about it.
- This $20,000 that we're showing as an expense in every period,
- and it actually might be more obvious if we think about period 2 or period 3
- We're showing it as an expense but $20,000 did not go out of the door in year 2, or year 3.
- We're just showing some of the expense from previous years.
- So no cash went out of the door.
- So in any of these periods, the depreciation expense
- should be added back to the operating profit,
- to figure out the cash from operations.
- And you might say
- "Wait! But we spent that $60,000, especially in year 1"
- And that goes here, under Capital Expenditures.
- The operations didn't push that cash up, the buisness itself,
- this is just an investment that we made.
- So it all works out, because what we see is that we got
- $50,000 cash from operations, and that makes sense
- beacause our revenue was $100,000
- just the labor, the cash labor, people's salaries, were $50,000
- So that's $50,000 of profit.
- This was not a cash expense, so from our operations we had $50,000 dollars,
- But then we did have the capital expenditures of $60,000 for the actual truck.
- So our ending cash would be $60,000+$50,000-$60,000.
- So our ending cash is going to be $50,000
- Now it might make a little bit more sense if we go to the next period.
- Our starting cash here is $50,000. It's our ending cash of the previous period.
- Our profit, once again, is $30,000.
- You add the profit to the depreciation, you get a $50,000 operating profit
- same as the previous year.
- Or I should say cash form operations, and that makes sense,
- because our operations really haven't changed.
- We have a very, very steady business.
- But this year, I have no capital expenditures.
- So I'm using the same truck as last year. So now Our ending cash:
- Our starting cash was $50,000, we had $50,000 from operations,
- now our ending cash is $100,000.
- So hopefully that gives you a sense of why we add back depreciation
- when we figure out the cash from operations
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