Working Capital vs. UCA Cash Flow
Q: Are depreciation and amortization expenses removed from the income statement because they are non-cash expenses?
A: Depreciation expense is the allocated portion of the cost of a company's fixed assets that are appropriate for the period. Depreciation expense is recognized on the income statement as a non-cash expense that reduces the company's net income. For accounting purposes, the depreciation expense is debited, and accumulated depreciation is credited.
Amortization expense is applied in the same manner in allocating the cost of intangible assets.
Depreciation expense is considered a non-cash expense because the recurring monthly depreciation entry does not involve a cash transaction. Because of this, the statement of cash flows adds the depreciation expense back to calculate cash flow from operations and uses that depreciation expense in order to calculate fixed asset spending for the year.
In addition, typical depreciation methods can be straight line (on a company’s books) or accelerated (on tax returns) and, therefore, accelerated depreciation can be used to lower income tax liability for the year.