See the attached qustion, my confusion is about depreciation, how come not using 40-30? thanks! Given the following information, calculate free cash flow to equity: Net income = $50. Working capital investment = $4. Beginning gross fixed assets = $90; ending gross fixed assets = $136. Beginning accumulated depreciation = $30; ending accumulated depreciation = $40. Depreciation expense = $27. Capital expenditures = $65. Net borrowing = $0. In addition, a piece of equipment with an original book value of $19 was sold for $10. The equipmenr had a book value at the time of the sale of $2. The gain was classified as unusual. Free cash flow to equity is closest to: A. $6. B. $10. C. $18. D. $27.
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sorry, mine concern is even more basic, why not using 40-30 instead of 27 for depreciation? how come this could happen?
Net Income is calculated from the Income Statement items, Depreciation Expense is a income statement item. So while calculating the NI, we had, at some point, deducted this depreciation expense of $27. This being a non-cash transaction we need to roll it back and add it back to the NI while calculating the FCFF/FCFE Hence you addback the number 27 and not the number 10 (40-30) in the calculations.
thanks! I guess I didn’t address my question clearly, Why depreciation charged in income statement is not same as the increase in accumulated depreciation on balance sheet?
Accumulated Depreciation is only for assets still on the BS. If you sold an asset the accum dep for that assets would dissapear.