Eli5: Why do a depreciating asset increase in the cash flow even though it is an expense?

Question

Eli5: Why do a depreciating asset increase in the cash flow even though it is an expense?

In: 2

Answer 1

A depreciating asset doesn’t affect cash flow. But if you are looking at a company’s books, you might see that they have made a loss of 10K. Digging deeper, you see that the have had depreciation of 100K but no capital purchases. That depreciation didn’t affect their cash flow, although it did affect their profit. This means that despite the 10,000 dollar loss, their cash situation has improved by 90K.

So in order to understand the company’s cash situation, you have to look at both profit, capital expenses, and depreciation.