Question on EBITDA and Adding Back D&A
If a company has a line item for D&A on the Income Statement would you ever add back this amount of D&A vs the D&A on the CFS? What causes the difference between the two?
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You should use the D&A on the CFS. I believe that sometimes some depreciation can be embedded in COGS. According to Investopedia, the source of the depreciation expense determines whether the expense is allocated between cost of goods sold or operating expenses, so you should use D&A from the CFS for accuracy.
On the CFS you use the difference between the Accumulated Depreciation on the balance sheets (starting and ending). The Income statement depreciation shows depreciation expense. There are two instances that I know of where depreciation is not an expense: (1) it becomes a product cost because GAAP accounting requires absorption costing - in this case depreciation becomes a part of COGS, inventory or WIP and (2) fixed assets used for R&D are to be expensed to R&D and not depreciation.
Edit: this is why you always use the difference in accumulated depreciations.
Nice didn't know this. Thanks!
Does instance #1 also apply to IFRS?
Seems like yes... I just put 'IFRS absorption costing' into the google machine and it said that it is required for it to be compliant.
Think this is saying that CFS D&A should be the change in B/S D&A and not necessarily the income statement D&A.
If you are adding something to EBIT to get to EBITDA, you should take it from the CFS. No need to get from B/S. If the company is doing acquisitions, the B/S method will actually be wrong
If I have a BS and an IS and I am trying build out a CFS, which do I use as my D&A? Given my comment above about not having all of the D&A expensed, then where do I get the correct D&A?
ok
There may be an instance that under certain conditions for the GAAP, the depreciation may actually become a product cost and thus can not be added back to the net income to arrive at the Cash from Operations amount. I would generally use the difference in the Accumulated Depreciation amount (current period - previous period) as this will be solely the contra-account for non-cash depreciation to the PP&E and thus would be the proper add-back. This amount must match the add-back amount on the cashflow statement.
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