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Income statement: Depreciation -> COGS

I’m not sure if this is level 1@@

Just want to check if deprecation will be classify in COGS within income statement? Many thanks!

Why I’m asking this is because Capitzlized Interest

Book2, page 36 - Capitalized Interest

Capitalized interest is not reported in the income statement as interest expense. Once construction interest is capitalized, the interest cost is allocated to the income statement through depreciation expense or COGS.

My first instinct is will it the same result? Thanks!

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There’s a separate line for Depreciation Expense generally

ro424 wrote:

There’s a separate line for Depreciation Expense generally

But I remember generally there is no depreciation item on Income Statement? I always find it through Cash Flow statement.

FrankCFA wrote:

ro424 wrote:

There’s a separate line for Depreciation Expense generally

But I remember generally there is no depreciation item on Income Statement? I always find it through Cash Flow statement.

Huh?  EBITDA - Earnings before interest taxes DEPRECIATION & Amortization. 

Depreciation is a non-cash charge… the only reason it shows up on the Cash Flow statement is to be added back to net income… because it was a non-cash charge that was charged against earnings as an expense.

I was wondering the same thing. Found this:

Total depreciation expense may be allocated between the cost of sales and other expenses. Within the income statement, depreciation expense of assets used in production is usually allocated to the cost of sales, and the depreciation expense of assets not used in production may be allocated to some other expense category. For instance, depreciation expense may be allocated to selling, general, and administrative expenses if depreciable assets are used in those functional areas. Notes to the financial statements sometimes disclose information regarding which income statement line items include depreciation expense, although the exact amount of detail disclosed by individual companies varies.

(Institute 477)

Institute, CFA. 2016 CFA Level I Volume 3 Financial Reporting and Analysis. CFA Institute, 07/2015. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

The only difference between including depreciation in COGS and including it in the Depreciation line is that Gross Profit will change.

Everything from Operating Profit down will remain the same.

Simplify the complicated side; don't complify the simplicated side.

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Question is, which depreciation should be added back to EBIT in order to calculate EBITDA? The annual depreciation or the one that has real impact in PL? If I produce more units of a good than I sell in a given year, there will be part of the depreciation which will remain capitalized in the inventory with no impact in PL. Should this depreciation also be added to EBIT or only that depreciation that has had an impact in PL through SG&A and COGS? Which amount of depreciation is disclosed in the financial statements? Annual depreciation or only the one that has had impact on the PL?  Thank you. 

My guess is that only that depreciation that impacts PL should be added back. But I’m not sure if this is the amount disclosed.

Depreciation expense which is capitalized and is not contained in current result must not be added back to EBITDA. It will be part of result of future period once inventories are sold or used in production.

Gone fishing...

Thanks! And do you know which is the amount disclosed? The one contained in the current result?

Required disclosures: [IAS 2.36]

  • accounting policy for inventories
  •  
  • carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The classifications depend on what is appropriate for the entity
  •  
  • carrying amount of any inventories carried at fair value less costs to sell
  •  
  • amount of any write-down of inventories recognised as an expense in the period
  •  
  • amount of any reversal of a write-down to NRV and the circumstances that led to such reversal
  •  
  • carrying amount of inventories pledged as security for liabilities
  •  
  • cost of inventories recognised as expense (cost of goods sold).

https://www.iasplus.com/en/standards/ias/ias2

Gone fishing...

I ask it because, where I live (Spain), Income Statement is presented by nature and not by function. And total depreciation expense is shown in the income statement and you cannot add it directly to EBIT in order to calculate EBITDA. You’d be over/under estimating it depending on the case. 

Thanks!

wilbcn wrote:

I ask it because, where I live (Spain), Income Statement is presented by nature and not by function. And total depreciation expense is shown in the income statement and you cannot add it directly to EBIT in order to calculate EBITDA. You’d be over/under estimating it depending on the case. 

You can. Doesn’t matter. You have an EBT position shown anyway. Thus you should add the cost of financing and total depreciation and amortization to get EBITDA.

PS

Cost of financing added to EBT to get EBIT only periodical expense, not capitalized one.

Gone fishing...

But total depreciation for the year (e.g. Linear depreciation) does not coincide in many cases with the one that has had impact in the PL. Part of it could be capitalized (if I produce more than I sell during the year) or, on the contrary, I could sell more than produced this year (lowering inventory). In both cases, total depreciation for the year would be the same(following linear depreciation). However, depreciation impact on PL would be different. In the first scenario, impact would be lower and in the second, higher. When ordered by nature (at least in Spain), you can see the depreciation expense. However, this is partially corrected with a line called variation in finished products and WiP. Problem is that you don’t have a breakdown of this line and, thus, you don’t know how much of the depreciation expense should be corrected in order to know the real impact of depreciation in the PL. In my opinion, this is the same whether I start from EBIT or from EBT. 

My question was if, for instance, in the US, you have EBIT and, if you want to calculate EBITDA, you can just add the depreciation expense disclosed (if any) because this would mean that the amount disclosed is the one that has had impact in the PL that year. 

You should count only for depreciation expense contained in COGS no matter what balance of inventory is sold in current period.

If it was sold more than produced in current period this simply means that some previously capitalized depreciation cost will be recognized as an expense in the current period. It was contained in Inventory beginning balance. Thus would be a part of current EBITDA.

Gone fishing...

I think that we’re both saying the same! 

Thank you!! 

Capitalization is a hint-free way to create so-called silent reserves to adjust results as well as impacting on the tax payout. Watch out on likely manipulations.

Gone fishing...

I agree! Good advice!