Depreciation in cash flow statements is calculated by adding the depreciated amount to the net income after taxes. Because depreciation is in essence the recovery of funds over a year's time, it must be accounted for as an increase, even if a company sustains an operating loss for the period the cash flow statement is applicable. The amount of depreciation will not reflect a source of income, but a source of funds. Ensuring that depreciation is accounted for correctly will help the small business owner to maintain an accurate distinction between income and the recovery of expended funds through depreciation credit.
Determine the net income after taxes for the business. Net income after taxes is the amount the business makes after all costs of doing business are subtracted and taxes are paid on the revenue for the period in question. For example, company A has determined that after deducting all costs of doing business and subtracting taxes, it has made $800,000 for the quarter.
Determine the amount of depreciation for the year. Continuing the example, company A uses the accelerated cost recovery system, or ACRS, to calculate depreciation of its assets. The ACRS is calculated by grouping the assets into categories, according to the assets' useful life. For example, a company truck has a useful life of three years. The truck cost the company $21,000. The cost is divided by three years to get a yearly depreciated value of $7,000. Repeat the depreciation process for each asset and total the amount for the year to arrive at the yearly depreciated amount.
Divide the yearly amount of depreciation by the time period the cash flow statement is applicable for. For example, where a cash flow statement is prepared for each quarter, the yearly depreciated amount must be divided by four to reflect the quarterly depreciated amount. Company A determines that the yearly amount of depreciated assets is $120,000. Company A divides $120,000 by 4 to get a quarterly depreciated amount of $30,000.
Add the depreciated asset amount applicable for the cash flow statement period to the net income after taxes to arrive at the total source of funds. Continuing the example, company A reports a quarterly net income after taxes of $850,000 and a quarterly depreciation of assets of $30,000. Adding $850,000 to $30,000 equals $880,000 in total funds provided by operations for the quarter.
Eric Johnston has been a professional business/finance writer since 2000. He began his career by assisting new business start-ups in writing business plans. Johnston is currently pursuing a master's degree in economics from Arizona State University.