How Does Depreciation Affect Cash Flows?

by Thomas James ; Updated September 26, 2017
Cash flow indicates that a company has an excess of cash income over cash spending in a given period of time.

Positive cash flow indicates that a company has an excess of cash income over cash spending in a given period of time. Depreciation is an accounting concept that symbolises the "wear and tear" on a capital asset.

Cash Flow

Cash flow is crucial to the health and viability of a company. A company must have positive cash flow if it is to meet the financial obligations the company is faced with. Cash flow statements can describe cash flow over varying periods of time. Weekly, monthly, and quarterly statements are common.

Depreciation

When a company makes a capital purchase it is recognised that at some point in the future the capital asset that has been purchased will need to be replaced. Companies compensate for this eventual cost of replacing the capital asset by depreciating the asset over the period of its working life.

Effect of Depreciation on Cash Flow

Depreciation does not require cash to be spent during the period that a capital asset is being depreciated. However, when a capital asset has to be purchased, cash will have to be spent. The outflow of cash associated with the purchase of a capital asset will appear on a cash flow statement, but its depreciation will not.

About the Author

Thomas James has been writing professionally since 2008. His work has appeared on the science-fiction blog Futurismic. He writes about technology, economics, management, science fiction, politics and philosophy. James graduated from Trinity Catholic School and holds A-levels in physics, maths, chemistry and an AS-level in English language.

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