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How does depreciation enter into the calculation of operating cash inflows? How does the income statement format

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How does depreciation enter into the calculation of operating cash inflows? How does the income statement format in Table 11.6 relate to Equation 4.3 for finding operating cash flow(OCF)?
How does depreciation enter into the calculation of operating ca
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Calculation of Operating Cash Inflows Using the Income Statement Format TABLE 11.6 Revenue Expenses (excluding depreciation and interest) Earnings before depreciation, interest, and taxes (EBDIT) Deprcciation Earnings before interest and taxes (EBIT) Taxes (rate = T) Net operating profit after taxes [NOPAT = EBIT x (1-T)] + Depreciation Opcrating cash inflows (same as OCF in Equation 4.3) OCF = [EBIT × (1-T)] + Depreciation 4.3

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Depreciation is used to decrease the firms total tax liability and then is adde...View the full answer


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Principles Of Managerial Finance

Principles Of Managerial Finance

ISBN: 978-0136119463

13th Edition

Authors: Lawrence J. Gitman, Chad J. Zutter

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Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.

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