Question

If depreciation is a method of allocating cost rather than an actual cash flow, discuss how depreciation impacts the income statement and overall cash flows

Answer 1

Depreciation is considered as non cash expenses. Since, Depreciation is an expense, so company can deduct depreciation expense from taxable income and company need to pay less tax. Depreciation is reported in income statementa s expense and company take tax deduction for depreciation expenses. So, if depreciation expense is high then taxable income would be lower and tax expense would lower, also net income of comapny reduce because of higher depreciation expenses.

In cash flow calculation, depreciation is added in net income of company. So, if depreciation expense is higher than cash flow of company would also be higher and tax expesne would be lower.