Depreciation is another idea that does not seem to be considered holistically from a cash flow perspective when calculating profit. As a result, it fails to provide proper cash flow information when considering the transactions that involve depreciation. Let’s say you buy a piece of equipment for $100,000, and let’s assume you pay cash for it. You will now be $100,000 poorer from a cash flow perspective. This $100,000, however, doesn’t make it to the income statement as a $100,000 cash transaction even though that is how you paid for it.
From an accounting perspective, that asset you purchased must now be depreciated. Let’s say the equipment is depreciated equally over five years at $20,000 per year. The $20,000 goes onto ...
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