I am preparing a cash flow statement (indirect) and have a question on depreciation.

Given the following info, what number would I use on the statement?

Dec 31, 2006 Dec 31, 2007

(315,400) (365,800)

This is a difference of 50,400. But, in the additional information section it states that the income statement reported depreciation as 96,000. Do I use the 96,000 since it came from the income statement, or do I use some combination of the 2 numbers??

Quote:

---

Originally Posted by barneyasada

I am preparing a cash flow statement (indirect) and have a question on depreciation.

Given the following info, what number would I use on the statement?

Dec 31, 2006 Dec 31, 2007

(315,400) (365,800)

This is a difference of 50,400. But, in the additional information section it states that the income statement reported depreciation as 96,000. Do I use the 96,000 since it came from the income statement, or do I use some combination of the 2 numbers???

---

As far as I know, you should add up in the cash flow statement the depreciation amount which you deducted in the income statement, so I would say you should probably take 96,000 as reported on the income statement.

The indirect method starts with net income and is making adjustments to get it to the actual cash figure. Net Income and cash don't correspond. As a simple example, you could have $100,000 in sales, but if that went into receivables and only $90,000 of it actually got paid through the year, you don't have $100,000 in cash. You got $90,000 in cash. So the sales doesn't match the cash.

You don't directly see those numbers like in my example (because it's the indirect method), but it's mixed up in the overall numbers. The example was just to make the point of why you have to adjust net income.

Another reason is non-cash items. Depreciation is subtracted out as an expense on the income statement. But you didn't pay any cash for it -- it's just an adjusting entry. So we have to reverse that off the income statement. Since it was subtracted, we have to ADD it back in on the cash flow.

All of your operating section adjustments are for reasons like this: net income simply isn't the same as cash.

The other difference in your depreciation is because you must have disposed of an asset in some way.

315,400 beginning balance
+ 96,000 current year's depreciation (as on income statement)
=411,400 after depreciation addition

But the ending balance is 365,800... so somewhere 45,600 was subtracted back off that, presumbly for the disposal/sale of something. You should find that information somewhere in that additional information given. It's a good idea to do this for each account and make sure you've accounted for each change that happens.