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7 answers

http://en.wikipedia.org/wiki/Depreciation

2006-06-06 02:37:45 · answer #1 · answered by sexton_blake 1 · 0 0

Depreciation is the value loss of an investment good like cars, machinery, real estate and so on.

As long as you own this good, the depreciation has no effect on the cash flow at all. Your cash flow will be higher than the net gain, for the difference of depreciation.

Considering the entire lifecycle of the good in your company, the total of cash flow (investment minus resale, if any) equals the total of depreciation. So the depreciation helps you not to forget the financial consequences of owning a good.

2006-06-06 07:13:41 · answer #2 · answered by swissnick 7 · 0 0

Depreciation is the accounting mechanism of accounting for the cost of an asset over time. The most straightforward method is straight line where the salvage value of the asset is estimated at the end of a time period, such as 5 years. Then, every year, constant increments are taken to get down to the salvage value.

The company gets a tax deduction with the depreciation so that would increase cash flow.

2006-06-06 03:10:18 · answer #3 · answered by Arbitrage 7 · 0 0

Depreciation is a way to amortize/expense the cost of a long-term asset over the useful life of that asset. If, for example, your company purchased a computer for $2,000 and determined that it had a useful life of 3 years (36 mos.), you would record the $2K purchase price as a fixed asset on your balance sheet and then book depreciation expense of $55.56/mo. ($2K/36 mos.) over the next 36 mos. At the end of the 3 years, the computer will have a book value of $0 because it'll be fully depreciated.

With regard to cash flow, depreciation is a non-cash expense. When you originally purchased the computer, you would show a cash outlay of $2K. Going forward as you book depreciation expense, the $55.56 would be included on your cash flow statement as an item to reconcile your net loss to cash used in operations. In other words, you would add the depreciation back to your net loss since the expense doesn't represent a cash expenditure.

2006-06-06 06:29:21 · answer #4 · answered by putnach 1 · 0 0

If you are apeaking of a house depreciating, that is not a good thing. It means that the house you paid 100k for is now worth less. So if you decide to move you will need to pay off the remander of the loan yourself after subtracting the selling price.

As far as cash flow is concerned, there really isn't anything to speak of. Since you cannot take money out of the house, you can't increase your cash flow by using your equity.

2006-06-06 02:42:30 · answer #5 · answered by Xkape 2 · 0 0

Depreciation is a term associated with recognition of an expense that is associated usually with a fixed asset such as buildings, cars, equipments or for assets that sell lower each year with or without usage.

it is accepted as an expense in accounting for income since it is permitted by any government to decrease tax base in order to decrease tax payments

it affects your cash flow not becuase of the depreciation you recognized but becuase of the tax effect it has yielded. for example, your net income before recognizing depreciation is ten thousand, depreciation for the year would be 4,000. then the allowable tax base is 6,000 if the tax rate is 32% then the tax payment if you are not going to recognize depreciation would be 3,200 but if you would recognize the depreciation, your tax payment would only be1,920.

So you see, if you recognize depreciation, it decreases your tax payment.

Decreased tax payment means lesser cash outflow..

2006-06-06 21:11:06 · answer #6 · answered by yana3856 2 · 0 0

You spend $30,000 on a car. You drive it off the sales lot now the car is worth $28,000.
You drive it for a week now the car is worth $24,000. You try to sell the car after one week you will only get $24,000. You lost $6,000. in one week. (these figures are definitely not accurate, just explaining.)

2006-06-06 02:40:36 · answer #7 · answered by older woman 5 · 0 0

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