Question

Explain the term “ Depreciation is a NON cash expense” and how do company’s use it.

Answer 1

Depreciation does not directly impact the amount of cash flow generated by a business, but it is tax-deductible, and so will reduce the cash outflow related to income taxes.depreciation is considered a non - cash expense , since it is simply an ongoing charge to the carrying amount of a fixed asset designed to reduce the recorded cost of the asset over its useful life. When creating a budget for cash flows, depreciation is typically listed as a reduction from experience, thereby implying that it has no impact on cash flows nonetheless, depreciation does have an indirect effect on cash flow.however depreciation only exists because it is associated with a fixed asset.when that fixed asset was originally purchased, there was a cash outflow to pay for the asset.thus, the net positive effect on cash flow of depreciation is nullified by the underlying payment for a fixed asset.