Hi All,
I'm looking at financials where D&A on the Income Statement is less than the D&A added back to CFO on the Cash Flow Statement. How is this possible/What is going on?
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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.
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.
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.
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.
Deleted my post. Read the question wrong.
mistake or not, use the number that's given to you
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
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.
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.
I'm a FA at a F100 aerospace manufacturing company. This.
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