Q: Is the cost of goods sold depreciation an add back?
A: In computing the gross margin or net income plus depreciation – traditional cash flow – depreciation expense is removed as an expense or, in effect, added back. If depreciation expense also exists as an operating expense, it is removed as an expense in computing SG&A% and is removed in the process of computing traditional cash flow, i.e., net income plus non-cash charges.
Q: Why doesn't the accrual depreciation expense and change in accumulated depreciation match? The difference between accumulated depreciation is $173,225 ($254,795-$81,570), but the accrual depreciation expense per the financial statement is $176,563.
A: Usually the difference is explained by the sale or retirement of assets that remove depreciation expense from Accumulated Depreciation. In this instance, it appears that the company sold or retired assets with accumulated depreciation of $176,563 – $173,225 = $3,338.
Q: Where does the difference of $3,338 come in?
A: It represents the amount of Accumulated Depreciation for assets sold or retired. Therefore, the amount is removed from the total for Accumulated Depreciation once the asset is sold or retired.
Course overview: Business Income Tax Returns and Ratio Analysis