Depreciation in the Cash Flow Statement of Manufactured Firms: Amount Incurred or Amount Expensed?

The article focuses on the depreciation of the cash flow statement of manufacturing firms in the United States. Consistent with FASB Statement No. 95, a company that provides a set of financial statements that reports both financial position and results of operations shall also provide a cash flow statement for each period for which results of operations are provided. The cash flow statement shall explain the change during the period in cash and cash equivalents, and shall classify cash receipts and cash payments as resulting from investing, financing, or operating activities. The article considers that should the depreciation adjustment be the amount of depreciation cost incurred for the period, whether expensed or capitalized in inventories, or should it be the amount of depreciation expensed for the period, whether as a separate expense line item and/or as part of cost of goods sold or selling and administrative expenses. It demonstrates that the depreciation adjustment could be either amount, depending upon the availability of information and whether the adjustment for the change in inventories includes or excludes capitalized depreciation, regardless of whether cash flow from operations is derived using the direct method or the indirect method.