Depreciation on IS vs CF

10y

This could be a situation where D&A for operating expenses and COGS are treated separately (e.g. manufacturing company may allocate depreciation of machines to COGS and depreciation of office furniture to OpEx). In this situation, you may not see the D&A that is rolled into COGS split out separately. Just a theory - there are other possible explanations. I would go with the CFS if you are trying to calc EBITDA.

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LevFinGS

Gorilla

10y

I'm concerned with whether it's a mistake or not. It's a smallish company. When I build my model I would like it linked through the statements. Even if it's in COGS it's still a non-cash expense - why is not added back?

duffmt6

10y

LevFinGS:

I'm concerned with whether it's a mistake or not. It's a smallish company. When I build my model I would like it linked through the statements. Even if it's in COGS it's still a non-cash expense - why is not added back?

Shit gets messy.

"For I am a sinner in the hands of an angry God. Bloody Mary full of vodka, blessed are you among cocktails. Pray for me now and at the hour of my death, which I hope is soon. Amen."

DiggsRTC

Orangutan

10y

LevFinGS:

I'm concerned with whether it's a mistake or not. It's a smallish company. When I build my model I would like it linked through the statements. Even if it's in COGS it's still a non-cash expense - why is not added back?

If the depreciation added back to the CFS is larger than the depreciation expense you see on the IS, then it would make sense that the depreciation from COGS is indeed being added back - it would be the amount of CFS depreciation minus IS depreciation expense.

However, if it IS a mistake then it's a mistake - as Whiskey said, just use the numbers that are given to you.

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Extelleron

King Kong

10y

LevFinGS:

I'm concerned with whether it's a mistake or not. It's a smallish company. When I build my model I would like it linked through the statements. Even if it's in COGS it's still a non-cash expense - why is not added back?

If D&A added back on SCF is greater than the depreciation line on the income statement, then presumably the total amount of depreciation [the amount in COGS and stated separately] is being added back, so I don't think it's a problem, you would just use the number in the SCF.

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2 replies

Flake

10y

Deleted my post. Read the question wrong.

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Whiskey5

10y

mistake or not, use the number that's given to you

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Big4TASGuy

Orangutan

10y

It's doubtful depreciation would ever be put through COGS, but I guess if that's what happening then that would make sense, but I've personally never seen a situation where that would be passable under GAAP.

It's more likely that there is some sort of amortization, like debt or intangibles, that is a separate line item on the IS that is being grouped with depreciation for the addback on the CFS.

duffmt6

10y

Best Response

Auditor.John:

It's doubtful depreciation would ever be put through COGS, but I guess if that's what happening then that would make sense, but I've personally never seen a situation where that would be passable under GAAP.

It's more likely that there is some sort of amortization, like debt or intangibles, that is a separate line item on the IS that is being grouped with depreciation for the addback on the CFS.

Fucking accountants: http://accountingrulesforfinance.wordpress.com/2012/06/28/is-da-part-of… http://www.aabri.com/OC2010Manuscripts/OC10034.pdf

Before examining the potential problems of misreported data, a review of the key accounting guidelines for depreciating operating assets is in order. The overriding principle is OC10034 based on the mundane concept of absorption accounting, the costing method that is required for external reporting under both U.S. GAAP and the IFRS. Absorption costing involves the calculation of a standard overhead rate that must be included when determining manufacturing overhead costs. This cost rate is then applied to the total units of inventory that is produced during a specific time period. As inventory is produced, the depreciation of the operating assets used in manufacturing inventory items is to be transferred from a manufacturing overhead account into the work-in-process inventory. As the work-in-process inventory is completed and sold, a proportional amount of the depreciation expense is then transferred to the finished goods inventory and ultimately to the cost of goods sold (AIPB, n.d.).

"For I am a sinner in the hands of an angry God. Bloody Mary full of vodka, blessed are you among cocktails. Pray for me now and at the hour of my death, which I hope is soon. Amen."

accountingbyday

Mentor

10y

Auditor.John:

It's doubtful depreciation would ever be put through COGS, but I guess if that's what happening then that would make sense, but I've personally never seen a situation where that would be passable under GAAP.

It's more likely that there is some sort of amortization, like debt or intangibles, that is a separate line item on the IS that is being grouped with depreciation for the addback on the CFS.

You're an auditor? I'd do some reading.

The explanations here are excellent - Depreciation is baked into the Std Cost of most manufactured good, hence depreciation on CF would be higher than you're seeing on IS. If depreciation on CF is lower than IS I'd question it.

For this reason, my old firm (who worked mostly with small manufacturers) only used D&A from the CF to get to our EBITDA.

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Big4TASGuy

Orangutan

10y

Yeah I didn't think about the application of OH in a manufacturing environment under full costing. You obviously don't depreciate inventory itself, but yes the depreciation from the actual factory equipment would be a portion of the costs allocated to the inventory, which would then flow through COGS.

Outside of a manufacturing environment you won't see that.

CorpFinanceGuy

Neanderthal

10y

accountingbyday:

Auditor.John:

It's doubtful depreciation would ever be put through COGS, but I guess if that's what happening then that would make sense, but I've personally never seen a situation where that would be passable under GAAP.

It's more likely that there is some sort of amortization, like debt or intangibles, that is a separate line item on the IS that is being grouped with depreciation for the addback on the CFS.

You're an auditor? I'd do some reading.

The explanations here are excellent - Depreciation is baked into the Std Cost of most manufactured good, hence depreciation on CF would be higher than you're seeing on IS. If depreciation on CF is lower than IS I'd question it.

For this reason, my old firm (who worked mostly with small manufacturers) only used D&A from the CF to get to our EBITDA.

I'm a FA at a F100 aerospace manufacturing company. This.

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Going Concern

Human

10y

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