Depreciation on Income Statement vs. Cash Flow Statement

I’ve seen on many occasions the depreciation expense on the income statement is one figure, but when added back on the cash flow statement, a different figure is used. Any explanation for these differences that sometimes arise? Many thanks

Can you give a specific example?

Take Blockbuster Inc. latest Q3 filing for instance: Depreciation & intangible amortization for the thirty-nine weeks weeks ended 2009 is $103.2M on the income statement. On the cash flow statement, however, $106.1M of depreciation & intangible amortization is added back for the same time period. The difference is nominal, but I would like clarification nonetheless. For instance, do we add back the income statement figure or the cash flow figure when calculating EBITDA?

I’m going to guess that some depreciation may be buried in cost of good sold and not shown separately?

That was also my guess, though I’m hoping someone could confirm this or whether there is another explanation.

could be due to sale of units… ???

Well, It should not happen. it may be a typo error.

I would hope its not a typo haha. That would be a serious blunder. My only guess is that 2 lines under on the cash flow statement is Rental library amortization for $376m. I would bet that the difference is because on the income statement, they only amortize PP&E, and on the cash flow statement, they are showing all amortization (buildings, movies, etc.) but the other numbers aren’t showing this (movie amort is about $27m so there has to be something else). I wouldn’t worry about this for the CFA though because the numbers should match up.

the Two numbers can be different. On the SCF you use the difference of accumulated deprecation on the balance sheet and not the depreciation expense on the income statement. reason I know this is because I have taken the CMA exams. I’m not sure if the details for this are in the accounting section of CFA, I haven’t covered it yet. there are two instances when depreciation is not recorded as depreciation expense: 1. it becomes a product cost because GAAP accounting requires aobsortion costing. in this case depreciation becomes apart of COGS, inventory or Work in process (WIP) 2. fixed assets used for R&D are to be expensed to R&D and not depreciation. this is why you need to use accumulated depreciation and not income statement. you will see the numbers match compared to the SCF and BS.

First off, in response to the comment that it could be a typo, rest assured it is not. I’ve seen this quite often in many SEC filings, so there is an explanation. The question was not prompted for exam preparation purposes, but rather to explore an area I’ve come across frequently and would like clarified. cfaPower, your explanation seems to make sense to me. But just to confirm, assuming your point #1 holds in this case, would that mean that the $2.9M difference between the two statements is buried under COGS in the income statement? i.e., inventory was in stock for a long-period of time and realized depreciation, which was accounted for under COGS when the product sold, but then reclassified to depreciation + amortization when reconciled on the cash flow statement? And if that is the case, should we therefore expect the depreciation + amortization figure in the cash flow statement to always exceed the figure in the income statement (if/when discrepancies arise)?

the SCF is not reclassing any items, but is adjusting noncash changes from the BS. For publicly held companies, I’d say the liklihood would conclude change in assets that are depreciated and amortized on the SCF will exceed the expensed portions on the IS. However, every industry has differences. Manufactuers will always have a difference, whereas a company that is just a distributor or retailer would likely not have these differences.

In many corporate financials, changes in the BS items differ from changes reported on the SCF. Also, depreciation expense on the IS often does differ from changes reported on the SCF. This is touched on in the Free Cash Flow Valuation in L2, but the answer provided in the curriculum only touches on the issue. I think cfaPower provided a pretty good explanation of possible reasons why the SCF and IS don’t always equal each other with regards to depreciation. It is definitely not a mistake.

You can’t use the change in accumulated depreciation because of asset sales and retirement of fully depreciated assets. For CFA purposes you will be given the numbers pretty clearly so don’t worry about. For the real world you’ll have differences related to depreciation expense being captured in other lines on the income statement and balance sheet as was previously mentioned. Use the number in the cash flow statement. It’s the most accurate measure of the decline in valuem of net PPE attributable to passage of time and/or consumption of an asset.

The reasons can entirely vary based on the nature of the company and their reportable segments. For example, for most of the automakers, IS depreciation only includes their production plants not their financial segments which can be significant.

Thank you CFApower. Very useful.

My guess would be that the difference between expense and CF add-back is due to the CTA on international fixed assets denominated in a fixed currency on their subsidiary’s books, and that they’ve lumped in the CTA with amortization of intangibles and PPA on the cash flow statement

Although typically you would expect to see this as a noncash adjustment to equity (via OCI, self sustaining operation), so maybe It’s not the cumulative translation adjustment

Although it’s an old topic, I wanted to write why DAI differs on IS and CFS, it’s because of discontinued operations , which Blockbuster had during that time.

I was analyzing a casino (Olympic Entertainment Group) today, and they had the same thing on their IS and CFS. Therefore, i dug deeper, and found out that DAI on CFS includes depreciation, amortization and impairment also from Discontinued Operations, whilst on IS (COGS) it does not.

Yet, I do not know what is the reason behind it, because LOSS from Discont. Ops. also contributed to the IS, so why not add also DAI from Discont. Ops?

In my opinion:

If it is a manufacturing company, part of the depreciation expense (the one related with production assets) will be capitalized as more inventory value. This depreciation will then convert to a cost (and affect profit margins) once the inventory is sold (as part of COGS). The one added back to cash flow should be the sum of:

depreciation cost contained as part of COGS

depreciation expense which is part of SG&A

Hope this helps