![]() ![]() ![]() So you would actually put the $60,000 right over here, on capital expenditures. And on the cash flow statement you express that saying "I spent $60,000 on Capital Expenditure" sometimes it's "property plant and equipment". We know from our example that we used that $60,000 to buy a $60,000 truck. So let'a just say that at the beginning of this fiscal year, when I started this company, I had $60,000. I'm not really showing all the expenses or all of the details that you would actually have for a shipping company but we really just care about the accounting. Now I say it's simplified because this is a very simplified income statement for each of these periods. Let's see if we can better understand what a cash flow statement for my simplified shipping truck example company would actually look like. This is always detailed on the CF statement and/or in the notes that accompany the financial statements. In practice you will often see other non-cash expenses besides D&A being added back, and possibly other cash outflows that were not on the income statement being subtracted. net increase in working capital (for example an inventory increase, which does not impact income) cap expenditures (which were not included as an expense in calculating net income) + add back depreciation & amortization (because it was an expense but it wasn't cash) If you look at Walmart's CF statement you have to look not just at operating activities but the rest of the cash flow statement, and you will see "capital expenditures" getting subtracted to get to the net cash flow number. But in the year that you bought the truck you paid 60k in cash, and that shows up as a subtraction from cash flow. I did not watch the whole video but I see him adding depreciation of 20 to net income to find the cash flow. If cash was used to pay for it, then the balance sheet has 60k more in PPE and 60k less in cash. The 60,000 will also go on the balance sheet as PPE. The 60000 never appears all in one shot on the income statement, it is expensed a little at a time over years, on the depreciation line. The 60,000 will show as a capital expenditure (not expense) on the cash flow statement. Depreciation is non-cash, so you have to add it back to net income in order to figure out what the cash flow was. Net income, on the income statement, already has depreciation subtracted from it. ![]() I'm sure there is an explanation out there that will make my brain click but i've read all the comments and read articles on a bunch of different websites and every explanation boils down to "it is not a cash outlay so it should be added to profit" or "to balance the capex effect on the cash flow statement" neither of which goes far enough to explain the reason to add this to profit in the cashflow statement. How does adding depreciation to profit place 20k more of physical cash in my hands? When i think of cash, i think of the physical asset, i.e. Now my question is - since depreciation is not a cash outlay it should not reflect negatively in the cashflow statement, why does it then have a positive effect on cashflow? (in my mind it should just be left out) Therefore, the cash position of the company must be greater by that amount than is indicated by the profitability figure alone." I found this, "Even though depreciation is a legitimate expense and must be recognized, it is not a cash outlay. An excerpt from another site to contextualise my question. No one has satisfactorily explained why depreciation is added to profit in the cash flow statement. Hope I explained this in an understandable form. Depreciation affects profit/loss numbers, but not cash (the capital expense, however, does). So, you started with $60K, but bought the truck (leaving you with $0), then brought in $100K in revenue, while paying out $50K in labour (leaving you $50K in the bank). Note that there was a capital expenditure which "burned" the $60K you started the year with. (In other words, you didn't spend $20K out of the net new $50K added to the checking account over the year.) So, to recognize the $50K as "Cash from Operations", you have to add that $20K back to the net profit to balance to that $50K in cash received. But while depreciation is an expense, it is not a cash expense. Your profit was $30K ($100K - $50K - $20K), so that cash comes in. In the cash flow, however, you are essentially spinning this around to focus on the cash side. The table at the top is a very simplified income statement, so the depreciation expenses would reduce your operating profit. I was momentarily taken aback as well, and then suddenly remembered that it was a cash flow statement, not and income statement I was looking at. ![]()
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