Income statement depreciation

Accountants regard assets as resources that have not yet been used up. Assets are normally shown on the balance sheet at cost minus accumulated depreciation. In this sense, the depreciation charge for an accounting period is the means of converting a part of an asset into a current expenditure that is then listed as an expense in the income statement. 

Let us consider plant eqmpment costing I million and purchased on Jan. I, 1988. T le 9-18 ows the provision for the depreciation account for 1988, 1989, and 1990 for straight-line depreciation, assuming a service hfe of 10 years and zero scrap value. The credit entries of 100,000 for the depreciation in each year are balanced by the depreciation charge of 100,000 debited to the income statement (or trading and profit-and-loss account) in each year. Table 9-19 shows the corre-... 

One of the most important items in an income statement is depreciation expense. Although depreciation should not be thought of as a means to build up a fund to replace plant, it nevertheless does enable money to be retained in the business by reducing the profit available for distribution to stockholders. It is of course a duty of both accountants and management to see that sufficient money is retained in the business to replace assets and to invest such money in other processes or outside investment. 

An income statement or profit-and-loss account gives the net annual profit A vp before tax. In order to assess the annual cash income Ac, as a source of funds from the value of the net annual profit A vp given in the income statement, it is necessary to add back all noncash expenses such as the balance-sheet annual depreciation charge Abd-This practice sometimes erroneously suggests that depreciation is a source of funds, whereas cash income is the only source of funds. 

Net sales are the primary source of revenue from goods and services. This figure includes the amount reported after returned goods, discounts, and allowances for price reductions are taken into account. Cost of sales represents all the expenses to convert raw materials to finished products. The major components of these expenses are direct material, direct labor, and overhead. If the cost of sdes is subtracted from net sales, the result is the gross margin. One of the most important items on the income statement is depreciation and amortization. Depreciation is an allowance the federal government permits for the... 

A balance sheet applies only at one specific time, and any additional transactions cause it to become obsolete. Most of the changes that occur in the balance sheet are due to revenue received from the sale of goods or services and costs incurred in the production and sale of the goods or services. Income-sheet accounts of all income and expense items, such as sales, purchases, depreciation, wages, salaries, taxes, and insurance, are maintained, and these accounts are summarized periodically in income statements. 

Depreciation (negative on the income statement but will be added back on the cash flow statement) ... 

The income statement gives a good insight into the overall profitability and margins of a business. It has to be read carefully though, as several items listed are noncash charges such as depreciation that do not affect the cash flow of the business. Corrections for these items are made in the cash flow statement. 

Depreciation, Amortization, and Depletion. The federal government allows a company to charge off a portion of an asset due to wear and tear as well as obsolescence each year as an operating expense. This is a paper transaction and is not a cash item. Amortization is the decline in useful value of an intangible asset such as a patent. Depletion is the diminution of a natural resource, such as coal in a mine. All these paper allowances appear as one item in most income statements. 

Baber and Kang calculated worldwide income taxes paid as a percent of net income before depreciation and taxes (as reported in financial statements) between 1975 and 1987 for 54 U.S. pharmaceutical firms with R D expenses greater than 5 percent of sales (24,224). Table 4-5 shows the income tax rates from 1981-87. Taxes paid for this sample of firms was in the range of 29 to 34 percent of income until 1987, when taxes paid jumped to 39.7 percent of income. 

Scrutiny of the balance sheet and the income statement reveals how much money flowed through the company how much profit was made how the funds provided by the net profit, depreciation, sale of common stock, and other items were used and how the cash generated affected the company operations. The changes in financial position show how the company managed its funds. 

Actual operating expense reports, given in Table 16.10, form the basis for information needed for the income statement. Table 16.8, such as the cost of goods sold, depreciation, amortization and depletion, and general overhead expense. This information would be used in the quantitative measures of financial attractiveness. 

Table 27.9, a table of capital recovery factors, enables us to calculate the equivalent uniform annual cost (EUAC). The 120,000 figure is our base (No. 1 in Table 27.9). In conventional accounting, this would likely determine the capital charge the department manager would see on the income statement if the company used straight-line depreciation. It represents only depreciation of the asset. Using a 15 percent cost of capital...

Annual debt-servicing costs, exduding amortization (i.e., just interest and finance charges), are also considered as costs, but these are part of the finandal cash outflows and should not be considered as part of the operational cadi outflows in finandal analysis. However, both depreciation and interest costs affect the taxable income level and therefore tax payments and net aftertax income. It is therefore necessary to project annual income statements for the purposes of estimating tax payments prior to preparing a cash flow statement for either finandal analysis or discounted cadi flow analysis. 

For an accurate perception of invested capital, it is important to know how certain assets are treated on the balance sheet and then on the income statement through a depreciation expense. When a company obtains tangible assets such as PP E, the asset is capitalized on the balance sheet and depreciated over time. Intangible assets such as a brand name, a distribution network, or a patent are expensed in whole on the income statement immediately. Companies with significant amounts of intangible assets will find that their invested capital will be underestimated, leading to an artificially high or overstated ROIC. 

The reconciliation between the cash flow statement and the income and expense statement is as follows. Start with the 40,000 from the last line in the cash flow statement, subtract 20,000 for the depreciation expense, and add back the 30,000 mortgage loan principal payment (not an allowed expense). The result is the net after-tax earnings. Figure B.ll is a set of statements from a small oil company. The statement of operations lists revenue and expenses, whereas the balance sheet lists various assets, liabilities, and stockholders equity ( net worth ). So-called capital items such as buildings, equipment, oil and gas property, and various intangibles are assets. Operating costs are deductions from revenues for operations not including expenditures for capital items. 

E. Income projections (profit and loss statements) for multiple years sales, fixed costs (mortgage, loan interest, depreciation, rent, taxes, insurance, advertising, salaries, benefits), variable costs (cost of material, hourly... 

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