What is the impact of depreciation on cash flow statements?

Depreciation does not directly impact cash flow, but it does affect the amount of tax a company pays, which indirectly influences cash flow.

Depreciation is a non-cash expense that reduces a company's earnings before tax. This means that although it does not directly reduce the amount of cash a company has on hand, it does decrease the company's taxable income. As a result, the company pays less tax and has more cash left over, which increases its cash flow.

The impact of depreciation on the cash flow statement can be seen in the operations section. Here, net income is adjusted for non-cash expenses, including depreciation. This adjustment is necessary because the cash flow statement aims to show the actual inflow and outflow of cash, and depreciation, being a non-cash expense, does not involve an actual outflow of cash.

However, it's important to remember that while depreciation can increase cash flow by reducing the amount of tax a company pays, it does not represent a source of cash. It is merely an accounting practice that allows companies to account for the wear and tear on their assets over time.

In summary, depreciation does not directly impact cash flow, but it does have an indirect effect by reducing a company's taxable income. This can result in the company paying less tax and having more cash available, which can increase its cash flow. This is reflected in the cash flow statement, where depreciation is added back to net income in the operations section.