accelerated depreciation

CFA Level I
#1

How does accelerated depreciation of the early years of an assets life result in a decrease in shareholder equity but not cash flow from operations?

#2

Accelerated depreciation results in a larger depreciation charge on the income statement. So, reported profit will be smaller, which makes shareholder’s equity less than if the firm didn’t use an accelerated depreciation method. Cash flow from operation is not affected by depreciation, since depreciation is a non-cash charge. Therefore when you calculate CFO you want to ignore the impact of depreciation. You do that by adding it to NI (which was already affected by the depreciation charge) so that you don’t count it as cash spent.

#3

There is more depreciation in the early years, so net income is lower than if you used straight-line depreciation. My attempt to answer on the second part is because depreciation is not a factor in determining cash flow from operations (it’s a non-cash item)…

#4

because depreciation is a non-cash charge. since cash taxes are going to be the same (they are based on tax statements, not financial statements) CFO is unaffected

#5

Thank you for your quick response. Depreciation is not even a cash flow duh! Also depreciation of an asset is in the investment category anyway or am I wrong?

#6

So, in countries where taxes are based on financial statement treatments, CFO will be higher under an accelerated method. Right?

#7

Dreary Wrote: ------------------------------------------------------- > So, in countries where taxes are based on > financial statement treatments, CFO will be higher > under an accelerated method. Right? that is my understanding.