Crash Course in Accounting and Financial Statement Analysis, Second Edition

Depreciation Is a “Phantom” Noncash Expense

Depreciation is a noncash, tax-deductible expense and can make up a significant portion of total expenses on a company’s income statement. Depreciation expense is an allocation of the costs of an original purchase of fixed assets over the estimated useful lives of those fixed assets.

If a company acquires fixed assets (e.g., several manufacturing facilities) in 2003, it has to pay for their total cost during the same year; however, on its income statement, the expense associated with the purchase is recorded over the useful life of those assets in the form of depreciation expense, in line with the matching principle.

The depreciation expense does not depict any actual cash outflow (payment).

Where Can I Find Depreciation? Depreciation expense is represented on the income statement either within a line item titled Depreciation and Amortization, or aggregated within other line items and SG&A expense (typically Cost of Goods Sold). If you do not see depreciation expense separately identified on the income statement, it does not mean that the company has no depreciation expense! It just means you need to do more digging. You will find it in the Cash Flow Statement as well as in the footnotes to the financial statements.