AIPB Depreciation Exam Practice 2025 – Complete Study Resource

Depreciation plays a significant role in cash flow projections as it is recorded as a non-cash expense. When companies calculate their cash flow, they start with net income, which includes all expenses including depreciation. Since depreciation is a non-cash expense, it reduces net income on the income statement but does not actually involve an outflow of cash during the period it is recorded.

By adding back depreciation to net income in the cash flow statement, a company can reflect its actual cash flows more accurately. This is crucial because it allows stakeholders to understand the cash generated from operating activities without being influenced by the accounting allocations of depreciation. Therefore, considering depreciation as a non-cash expense is essential for accurate cash flow assessments, thereby helping in better decision-making for investments and financial management.

The misunderstanding might arise from the notion that depreciation impacts cash flow negatively due to its effect on net income, but in reality, it’s a way to enhance the understanding of cash available in the business.