Cash Flow Statement problem

CFA Level I FRA
#1

Hello everyone,

I am doing the Schweser Notes 3. In page 135, problem 20. I am quite confused why depreciation expense will be classifed as no cash flow impact.

Thanks a lot!

#2

I smplify, but for giving you an idea :

  • In the Income Statement :

Net Income = Revenues - COGS - SG&A - Depreciation -(…)- tax

  • In the Cash Flow Statement :

Cash Flow from Operations = Net Income + Depreciation + Difference in NWC

_____________

You add back Depreciation , therefore there is no cash flow impact.

#3

Depreciation is an item that affects net income, but does not affect the actual cash in your pocket.

So if you record 10000 dollars as depreciation and your buddy records 10 dollars as depreciation, your net income will be lower than your buddy’s but the actual cash in hand for both of you will be the same.

So if you want to know the actual cash in hand, and you were provided with a net income figure, the next thing to do is to add back those things that weren’t actual cash outflow such as Depreciation.