Question

3. What is the cash flow effect on asset purchases and depreciation ?

Answer 1

On purchasing the assets, there will be cash outflows which will be reported in the cash flows from Investing activities.

While the computing the assets purchases, the depreciation charged shall be given effect to. However, the depreciation expense is a non-cash expense, hence not affected the cashflows. But it is having an effect of increasing the cash flows from operating activities as the depreciation is charged in the income statement and it will be added to the net income for adjustment to be made for reconciling the net income to cash flows.