Question

e. Suppose DDS’s depreciation and amortization expense increased by 50,000. How would this affect their cash flows from operating activities (4 points)?

Answer 1

e. The cash flow from operating activities will increase by $50,000. Depreciation and amortization is non –cash expense. They are considered in arriving at net income based on income statement. But in cash flow statement they are added back to net profit as adjusting items to reconcile net income with cash flow from operating activities the reason being there is no outflow of cash for depreciation and amortization expense. Depreciation and amortization are notional expenses charged for usage of assets in business. Depreciation is charged on plant, property and equipment like buildings, equipment, furniture, etc. Amortization is expense charged on intangibles based on useful life of asset. A cash flow statement considers actual receipts and outflows of cash and hence non cash expenses like depreciation and amortisation will increase cash inflows when added back to net income.