8 Comments
 

As depreciation expense is linked to CAPEX, doesn't the I/S get reduced by the depreciation amount? 

 

I would say the following:

  • P&L: EBT decreases by 5 (assume 5 inc. in D&A), and with a 20% tax, you end up with a Net Income of -4 (assume certain "tax protection")
  • CF: Net Income (-4) + D&A Again (+5) = 1 so your cash goes up by 1 - only impact is in your CF from Operations 
  • BS: Cash goes up by 1 and your PPE decreases by 5 hence your total assets are -4. Now, the Net Income plugs into your SHE (previous years' results or similar) and as your NI was - 4, your BS is now balanced

Does this makes sense to you?

 

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