The income statement will include depreciation as one of the expenses there. In this situation they will provide you with the income statement (and other financial statements) and you will have to construct the cash flow statement from these. Occasionally you will also see depreciation in a cash flow statement exercise or question using the direct method. It should be noted that depreciation is included as part of the calculation of cash generated from operations when using the indirect cash flow statement, which is the preferred method of presenting the statement in the US:įor more info on exactly how and where it fits in, see the tutorial on the indirect cash flow statement method. From the asset point of view, after 2 years your business would have recorded $40,000 of accumulated depreciation ($20,000 each year for 2 years) against the asset's original value ($200,000), giving a carrying amount (the net value to your business) of $160,000 for the vehicle. So you allocate $20,000 per year ($200,000 / 10 years) as an expense to the income statement.

You expect it to be used for 10 years in the business before replacing it. For example, you purchase a construction vehicle for your business for $200,000. The amount of this reduction is recognized as an expense each year and shown in the income statement. Depreciation is simply the systematic reduction in the value of a non-current (long-term) asset each year.

Question: Depreciation charged during the year will come under which activities? Answer: Depreciation actually does not come under any of the categories of the cash flow statement, at least when you're using the direct method :ĭepreciation is an expense, but an expense that never involves cash.

Depreciation cashflow