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

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

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Answer #1

Both Asset Purcahse and Depreaciation have a cash flow effect.

Purcahse of Assets shows outflow  of cash which is shown under CASH FLOW FROM  INVESTING ACTIVITIES in CASHFLOW STATEMENT.Companies use investing cash flow for making initial investment in fixed asset which shows the outflow of cash

Eventhough Depreciation is a non cash expence  which is used to reduce the value of asset,it have an indirect effect on cash flow as it reduces the tax liability.

DEPRECIATION affect the cashflow by reducing the amount of taxable income reporting to Government.Increase in depreciation cause decrease in taxable income.

note; However depreciation is orginated as a result of asset purchase which shows the out flow of cash,thus net positive effect of cash flow of depreciation is nullified by underlying payment for fixed asset     

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