Aanyone else having trouble with Reading 27 (Cashflows)? Lots of confusion. Why is depriciation (non cash expense) added back to Net Income? How is mortagage re payment a financing activity?
As you mentioned, it is a non-cash expense. The initial purchase price of the asset already left the company when it was acquired, but the expense is realised partially each period to spread the cost over the asset’s life. As the expense is being recorded, no money is actually leaving the business at the time so we add it back to the income figure.
There are a couple of videos on youtube which explain this really really well. Suggest you watch them!