Exercise7.8

An economics book has the following statement: "For the business firm there are, typically, three major sources of funds. Two of these, depreciation reserves and retained earnings, are internal. The third is external, consisting of funds obtained either by borrowing, or by the sale of new equities."

Required:

a. Is depreciation a source of cash? (Exclude all considerations pertaining to depreciation differences between taxable income and accounting income.)

b. If depreciation is not a source of cash, what might explain the belief by some that depreciation is a source of cash?

c. If depreciation is a source of cash, explain the manner in which depreciation provides cash to the business.