Evaluating Cash Flows: Depreciation Tax Flow Analysis

Cash flow statements tax calculations and balance sheet for the 3 financial years ending 30 June 2015 - 2017

Cash flow statements tax calculations and balance sheet for the 3 financial years ending 30 June 2015 - 2017

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While I was an intern at Abacus Capital, a local Indonesian beverage company needed advising in selling the company and I was fortunate to receive a close look at the inner workings of an acquisition. The experience gave me a better understanding of the acquisition process and how a Discounted Cash Flow analysis is done. I enjoy the idea of working for clients from a wide-range of industries and I am confident that my experience at Abacus would supplement my Transaction Advisory internship experience in KPMG Indonesia.

It is very interesting how the IRS uses depreciation as an investment vehicle to help businesses with their expenses and cash flow situation. Depreciation encourages business to purchase machinery and building which fuel economic expansion. The yearly expense recovery positively impact corporation bottom line; for equipment and vehicles it is usually 3 to 5 years and for buildings it runs longer between 15 to 30 years. Depreciation recapture is usually mandatory for assets that fall under the IRC Sec. 1231, Sec.1245 and Sec.1250,

The cash flow statement of Bega Company declares where the company’s cash comes from and how the company spends its cash. This cash flow analysis covers three years, from 2014 to 2016. There are three main categories to analyse the cash flow statement: cash flows from operating activities, investing activities and Financing activities.

Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally up to 30 years, or the lease term for leasehold improvements, if applicable. Leased buildings are capitalized and included in property and equipment when the Company was involved in the construction funding and did not meet the “sale-leaseback” criteria.

Analysing the cash flow statement would be a great place to first look when initially analysing a company. It is difficult for a company to manipulate the cash flow statements resulting in a honourable place to find the actual numbers. The cash flow statement is indicative of how well the company can convert net income into cash; it also helps to determine if a company is strong or weak. Panera realizes a positive net cash flow and is a strong company from their statements. To receive a deeper analysis, the three sections of the cash flow statements, cash flows from operations, cash flow from investing and cash flow from financing should be dissected.

Keown, A. J., Martin, J. D., & Petty, J. W. (2014). Foundations of finance: The logic and practice of financial management. Boston: Pearson.

i) Why is depreciation expense recoded in the income statement for the building as Heath believes the building is worth more now than when he bought it five years ago?

Cash flow (LO2) Assume a corporation has earnings before depreciation and taxes of $100,000, depreciation of $50,000, and that it has a 30 percent tax bracket. Compute its cash flow using the format below.

Always remember to: Footnote assumptions in detail Test your assumptions Use consistent cash flows and costs of capital

Besides, businesses depreciate long-term assets for both tax and accounting purposes. For accounting purpose, depreciation indicates how much of an asset’s value has been used up. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses. Depreciation is a non-cash expense. In addition, depreciation is used in accounting to try to match the expense of an asset to the income that the asset helps the company earn. For example, if a

If you believe in the old adage, "it takes money to make money," then you can grasp the essence of cash flow and what it means to a company. The statement of cash flows reveals how a company spends its money (cash outflows) and where the money comes from (cash inflows). (To read more about cash flow statements, see What Is A Cash Flow Statement?, Operating Cash Flow: Better Than Net Income? and The Essentials Of Cash Flow.)

Depreciation in accounting concept is the gradual conversion of the cost of a tangible capital asset or fixed asset into an operational expense (called as depreciation expenses) over the asset’s estimated useful life. There have 3 objectives of the depreciation: 1) Spread a large expenditure (purchase price of the asset) proportionately over a fixed period to match the revenue received from it. 2) Reduce the taxable income by charging the amount of depreciation against the company’s total income. In effect, charging of depreciation means recovery of invested capital, by gradual sale of the asset over the years during which output or service are received from it. 3) Reflect the reduction in the book value of asset due to obsolescence or wear and tear. Depreciation normally