How does Depreciation and Amortization increase the cash flow of a company?

3 Responses to How does Depreciation and Amortization increase the cash flow of a company?

1. mule

   June 26, 2009 at 11:34 pm

   Because they are non cash expenses (no cash outlay required) yet they are shown as expenses on the income statement thereby reducing taxable income and out of pocket income taxes due.

   It increases cash flow because the amount of tax paid to Uncle Sam is less than it would have been without depreciation.

   Technically, Depreciation is a Source of Funds and does in fact increase the cash flow of a company.
2. merp_nocrap

   June 29, 2009 at 12:45 pm

   depreciation means the value of certain money has decreased in relation to another money.
   depreciation is the opposite of appreciation
   just like good is the antonym of bad

   i hope this helps a lot!
3. Sandy

   July 2, 2009 at 1:11 pm

   Your question relates specifically to the cash flow statement. I’ll explain by way of an example. Let’s say you operate a tailor business and you made a $1,000 sale sewing uniforms. The cost of the materials (fabric, buttons, zippers, thread, etc) was $300 and the cost of payroll of the seamstress was $500, and depreciation of the sewing machine was $100. That means in the income statement, you made a net income of $1,000 – $300 – $500 – $100, or $100. All the transactions were in cash except for depreciation. Using the indirect method, you’d start off your cash flow statement with net income. So,
   Net income $100
   add:
   Adjustment for depreciation $100
   Cash flow from operating activities $200

   So you add depreciation to net income because your net income was arrived at AFTER deducting depreciation which is a non-cash transaction. If you took ONLY the cash transactions, you’d find cash flow from op’g activities was $1,000 – $300 – $500 = $200, which is what we got above.

   I hope this helped.