Level 2: 2 Doubts on Long-lived assets-depreciation & impairment effect affect, capital, therefore, operation, statements, affect, capital, therefore, operation, statements

DarienHacker

1. From Schweser Notes 2014 L2 Book 2, P.35 "Cashflow from operation" the last sentences,
What is meant by "Depreciation is noncash expense, aside from any taxes, therefore does not affect CFO"?
From my understanding, CFO=EBIT+ NCC- chg of working capital, how does one explain "depreciation does not affect CFO"?

2. On P.48 "Impact of impairment on financial statements & Ratio",
What is meant by "impairment loss hv no impact on CF & tax saving"?
I only know impairment loss is recorded in I/S & nothing else

cityboy

First of all, I think the equation should be CFO=NI-/+gain/loss from financing or investment cash flows+NCCs- chg of working  capitals. In the second, in my opinion, this equation is just one for you to calculate the CFO from B/S and I/S, not a definition of CFO. CFO is cash flow from operations, as the Notes presents, depreciation is noncash expense aside from any taxes so it doesn't have any cash flows. From this aspect. depreciation cannot affect the cash flows from operating. And I think this can explain your second question about impairment as well, just like depreciation, impariment is also a noncash item, so it cannot affect cash flows such as CFO.

cityboy

thz for ur replying understood!