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Monday, November 24, 2014 2:34:39 PM
HOW DOES DEPRECIATION AFFECT THE FINANCIAL STATEMENTS?
Depreciation is an especially tricky line item because it affects all three Financial Statements, but is often not broken out directly in the Income Statement even though it is an annual expense. Here is a summary of how Depreciation affects all three Statements (a similar description also applies to Amortization):
Income Statement: Depreciation is an expense on the Income Statement (often buried inside displayed line items such as COGS). Increasing Depreciation will increase expenses, thereby decreasing Net Income.
Cash Flow Statement: Because Depreciation is incorporated into Net Income, it must be added back in the SCF, because it is a non-cash expense and therefore does not decrease Cash when it is expensed.
Balance Sheet: Net Fixed Assets (generally Plant, Property, and Equipment) is reduced by the amount of the Depreciation. This reduces Fixed Assets. It also reduces Net Income and therefore Retained Earnings (Shareholders’ Equity) as well. As discussed previously, Depreciation is a non-Cash expense. Therefore, increases or decreases to Depreciation will not impact Cash directly.
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