Stock Market Insights With The Bull! (India)

What is Depreciations and how it affects - Income statements - Balance sheet - Cashflow statements Depreciation means spreading the cost of an asset over its useful life Depreciation is not cash going out Cash already went out when the asset was bought earlier Eg. Company bought a machine for Rs. 1000 •Useful life = 10 years •No salvage value At the time of purchase: •Cash ↓ Rs. 1000 or non current liability increased by 1000 if purchased through loan. •Property, Plant & Equipment ↑ Rs. 1000 Annual Depreciation = 1000 ÷ 10 = 100 per year In Income Statement: •Depreciation Expense ↑ 100 •Profit reduces by 100 Example: •Operating profit before depreciation = 600 •After depreciation = 500 PAT looks lower, even though no cash was paid this year. Balance sheet Balance Sheet entries: - Accumulated Depreciation ↑ 100 or - Net asset value reduces by 100 Eg. Item PPE - 1000 Less: Accumulated Depreciation - (100) Net Asset Value - 900 Cash Flow Depreciation reduced PAT but No cash actually went out So we add back depreciation to PAT. Eg. if PAT is 160 we add back 100 to 160 160 + 100  =  260 This cancels its impact on cash. Depreciation is added back because Profit was reduced for something that did not take cash.