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Depreciation

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Definition of Depreciation

Depreciation Image 1

Depreciation

A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to amortize the cost of acquiring Long term assets over the useful life of the assets.


Depreciation

A technique by which a company recovers the high cost of its plant-and-equipment assets gradually during the number of years they’ll be used in the business. depreciation can be physical, technological, or both.


Depreciation

a) Of capital stock: decline in the value of capital due to its wearing out or becoming obsolete.
b) Of currency: decline in the exchange rate.


Depreciation

Amortization of fixed assets, such as plant and equipment, so as to allocate the cost over their depreciable life.


Depreciation

An expense that spreads the cost of an asset over its useful life.


Depreciation

Both the decline in value of an asset over time, as well as the gradual
expensing of an asset over time, roughly in accordance with its level of usage or
decline in value through that period.



Depreciation

Reduction in value of fixed or tangible assets over some period
for accounting purposes. See Amortization.


depreciation

Refers to the generally accepted accounting principle of allocating
the cost of a long-term operating asset over the estimated useful
life of the asset. Each year of use is allocated a part of the original cost of
the asset. Generally speaking, either the accelerated method or the
straight-line method of depreciation is used. (There are other methods,
but they are relatively rare.) Useful life estimates are heavily influenced
by the schedules allowed in the federal income tax law. depreciation is
not a cash outlay in the period in which the expense is recorded—just
the opposite. The cash inflow from sales revenue during the period
includes an amount to reimburse the business for the use of its fixed
assets. In this respect, depreciation is a source of cash. So depreciation is
added back to net income in the statement of cash flows to arrive at cash
flow from operating activities.


Depreciation Image 2

Depreciation

The systematic and rational allocation of the cost of property, plant, and equipment
over their useful lives. Refer also to amortization and depletion.



Related Terms:

Accelerated depreciation

Any depreciation method that produces larger deductions for depreciation in the
early years of a project's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule
allowed for tax purposes, is one such example.


accelerated depreciation

(1) The estimated useful life of the fixed asset being depreciated is
shorter than a realistic forecast of its probable actual service life;
(2) more of the total cost of the fixed asset is allocated to the first
half of its useful life than to the second half (i.e., there is a
front-end loading of depreciation expense).


Accelerated depreciation

Any of several methods that recognize an increased amount
of depreciation in the earliest years of asset usage. This results in increased tax benefits
in the first few years of asset usage.


Accumulated depreciation

A contra-fixed asset account representing the portion of the cost of a fixed asset that has been previously charged to expense. Each fixed asset account will have its own associated accumulated depreciation account.


accumulated depreciation

A contra, or offset, account that is coupled
with the property, plant, and equipment asset account in which the original
costs of the long-term operating assets of a business are recorded.
The accumulated depreciation contra account accumulates the amount of
depreciation expense that is recorded period by period. So the balance in
this account is the cumulative amount of depreciation that has been
recorded since the assets were acquired. The balance in the accumulated
depreciation account is deducted from the original cost of the assets
recorded in the property, plant, and equipment asset account. The
remainder, called the book value of the assets, is the amount included on
the asset side of a business.


Accumulated depreciation

The sum total of all deprecation expense recognized to date
on a depreciable fixed asset.


Depreciation Allowances

Tax deductions that businesses can claim when they spend money on investment goods.


Depreciation expense

An expense account that represents the portion of the cost of an asset that is being charged to expense during the current period.


Depreciation tax shield

The value of the tax write-off on depreciation of plant and equipment.


depreciation tax shield

Reduction in taxes attributable to the depreciation allowance.



Double-declining-balance depreciation

Method of accelerated depreciation.


Earnings before interest, taxes, depreciation and amortization (EBITDA)

The operating profit before deducting interest, tax, depreciation and amortization.


Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

An earningsbased measure that, for many, serves as a surrogate for cash flow. Actually consists of working
capital provided by operations before interest and taxes.


EBDDT - Earnings before depreciation and deferred taxes

This measure is used principally by
firms in the real estate industry, with the exception of real estate investment trusts, which typically
do not pay taxes.


Straight line depreciation

An equal dollar amount of depreciation in each accounting period.


STRAIGHT-LINE DEPRECIATION

A depreciation method that depreciates an asset the same amount for each year of its estimated
life.


straight-line depreciation

This depreciation method allocates a uniform
amount of the cost of long-lived operating assets (fixed assets) to each
year of use. It is the basic alternative to the accelerated depreciation
method. When using the straight-line method, a business may estimate a
longer life for a fixed asset than when using the accelerated method
(though not necessarily in every case). Both methods are allowed for
income tax and under generally accepted accounting principles (GAAP).


straight-line depreciation

Constant depreciation for each year of the asset’s accounting life.


Sum-of-the-years'-digits depreciation

Method of accelerated depreciation.


tax benefit (of depreciation)

the amount of depreciation deductible for tax purposes multiplied by the tax rate;
the reduction in taxes caused by the deductibility of depreciation



tax shield (of depreciation)

the amount of depreciation deductible
for tax purposes; the amount of revenue shielded
from taxes because of the depreciation deduction


Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.


Adjusted EBITDA

Conventional earnings before interest, taxes, depreciation, and amortization (EBITDA) revised to exclude the effects of mainly nonrecurring items of revenue or gain and expense or loss.


Amortization

See depreciation, but usually in relation to assets attached to leased property.


amortization

This term has two quite different meanings. First, it may
refer to the allocation to expense each period of the total cost of an
intangible asset (such as the cost of a patent purchased from the inventor)
over its useful economic life. In this sense amortization is equivalent
to depreciation, which allocates the cost of a tangible long-term operating
asset (such as a machine) over its useful economic life. Second, amortization
may refer to the gradual paydown of the principal amount of a debt.
Principal refers to the amount borrowed that has to be paid back to the
lender as opposed to interest that has to be paid for use of the principal.
Each period, a business may pay interest and also make a payment on
the principal of the loan, which reduces the principal amount of the loan,
of course. In this situation the loan is amortized, or gradually paid down.


Amortization

Reduction in value of an asset over some period for accounting
purposes. Generally used with intangible assets. depreciation is the term used
with fixed or tangible assets.


Amortization

The systematic and rational allocation of capitalized costs over their useful lives.
Refer also to depreciation and depletion.


Average accounting return

The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.


BOOK VALUE

An asset’s cost basis minus accumulated depreciation.


Book value

An asset’s original cost, less any depreciation that has been subsequently incurred.


Capital Consumption Allowance

See depreciation.


Capital Cost Allowance (CCA)

The annual depreciation expense allowed by the Canadian Income Tax Act.


Capital gain

The gain recognized on the sale of a capital item (fixed asset), calculated
by subtracting its sale price from its original purchase price (less the impact of any
associated depreciation).


Cash flow

In investments, it represents earnings before depreciation , amortization and non-cash charges.
Sometimes called cash earnings. Cash flow from operations (called funds from operations ) by real estate and
other investment trusts is important because it indicates the ability to pay dividends.


Cash Flow

In investments, NET INCOME plus depreciation and other noncash charges. In this sense, it is synonymous with CASH EARNINGS. Investors focus on cash flow from operations because of their concern with a firm's ability to pay dividends.


Cash flow after interest and taxes

Net income plus depreciation.


Cash flow coverage ratio

The number of times that financial obligations (for interest, principal payments,
preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental
payments, and depreciation.


cash flow from operating activities, or cash flow from profit

This equals the cash inflow from sales during the period minus the cash
outflow for expenses during the period. Keep in mind that to measure
net income, generally accepted accounting principles require the use of
accrual-basis accounting. Starting with the amount of accrual-basis net
income, adjustments are made for changes in accounts receivable,
inventories, prepaid expenses, and operating liabilities—and depreciation
expense is added back (as well as any other noncash outlay
expense)—to arrive at cash flow from profit, which is formally labeled
cash flow from operating activities in the externally reported statement
of cash flows.


Changes in Financial Position

Sources of funds internally provided from operations that alter a company's
cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.


Declining balance

An accelerated depreciation method that calculates depreciation each year by applying a fixed rate to the asset’s book (cost–accumulated depreciation) value. depreciation stops when the asset’s book value reaches its salvage value.


Declining-balance

A method of depreciation.


Depletion

The systematic and rational allocation of the cost of natural resources over their useful
lives. Refer also to amortization and depreciation.


EBITDA

Earnings before interest, taxes, depreciation, and amortization.


Exchange risk

The variability of a firm's value that results from unexpected exchange rate changes or the
extent to which the present value of a firm is expected to change as a result of a given currency's appreciation
or depreciation.


Fixed Assets

Land, buildings, plant, equipment, and other assets acquired for carrying on the business of a company with a life exceeding one year. Normally expressed in financial accounts at cost, less accumulated depreciation.


Flow-through method

The practice of reporting to shareholders using straight-line depreciation and
accelerated depreciation for tax purposes and "flowing through" the lower income taxes actually paid to the
financial statement prepared for shareholders.


Funds From Operations (FFO)

Used by real estate and other investment trusts to define the cash flow from
trust operations. It is earnings with depreciation and amortization added back. A similar term increasingly
used is Funds Available for Distribution (FAD), which is FFO less capital investments in trust property and
the amortization of mortgages.


Internal finance

Finance generated within a firm by retained earnings and depreciation.


internally generated funds

Cash reinvested in the firm; depreciation plus earnings not paid out as dividends.


Long-term assets

Value of property, equipment and other capital assets minus the depreciation. This is an
entry in the bookkeeping records of a company, usually on a "cost" basis and thus does not necessarily reflect
the market value of the assets.


MACRS (Modified Accelerated Cost Recovery System)

A depreciation method created by the IRS under the Tax Reform Act of 1986. Companies must use it to depreciate all plant and equipment assets installed after December 31, 1986 (for tax purposes).


Modified Accelerated Cost Recovery System (MACRS)

depreciation method that allows higher tax deductions in early years and lower deductions later.


National Income

GDP with some adjustments to remove items that do not make it into anyone's hands as income, such as indirect taxes and depreciation. Loosely speaking, it is interpreted as being equal to GDP.


Negative convexity

A bond characteristic such that the price appreciation will be less than the price
depreciation for a large change in yield of a given number of basis points.


Net book value

The current book value of an asset or liability; that is, its original book value net of any
accounting adjustments such as depreciation.


Net Domestic Product

GDP minus depreciation.


Net income

The company's total earnings, reflecting revenues adjusted for costs of doing business,
depreciation, interest, taxes and other expenses.


Net investment

Gross, or total, investment minus depreciation.


Net Investment

Investment spending minus depreciation.


Net National Product

GNP minus depreciation.


Noncash charge

A cost, such as depreciation, depletion, and amortization, that does not involve any cash outflow.


Normalizing method

The practice of making a charge in the income account equivalent to the tax savings
realized through the use of different depreciation methods for shareholder and income tax purposes, thus
washing out the benefits of the tax savings reported as final net income to shareholders.


Obsolescence

The reduction in utility of an inventory item or fixed asset. If it is an
inventory item, then a reserve is created to reduce the value of the inventory by the
estimated amount of obsolescence. If it is a fixed asset, the depreciation method and
timing will be set to approximate the rate and amount of obsolescence.


Operating cash flow

Earnings before depreciation minus taxes. It measures the cash generated from
operations, not counting capital spending or working capital requirements.


Other sources

Amount of funds generated during the period from operations by sources other than
depreciation or deferred taxes. Part of Free cash flow calculation.


Positive convexity

property of option-free bonds whereby the price appreciation for a large upward change
in interest rates will be greater (in absolute terms) than the price depreciation for the same downward change
in interest rates.


Purchase method

Accounting for an acquisition using market value for the consolidation of the two entities'
net assets on the balance sheet. Generally, depreciation/amortization will increase for this method compared
with pooling and will result in lower net income.


Safe harbor lease

A lease to transfer tax benefits of ownership (depreciation and debt tax shield) from the
lessee, if the lessee could not use them, to a lessor that could use them.


Straight-line

A method of depreciation.


SUM-OF-THE-YEARS’ DIGITS

An accelerated depreciation method that makes the sum of the digits in an asset’s expected
life the denominator for a series of yearly depreciation fractions.
The numerators of these fractions are the asset’s years of life in reverse order.
An increasingly smaller depreciation fraction is applied to the asset’s (cost–salvage) value each year.


UNITS OF PRODUCTION

A depreciation method that relates a machine’s depreciation to the number of units it makes each
accounting period. The method requires that someone record the machine’s output each year.


User Cost of Capital

The implicit annual cost of investing in physical capital, determined by things such as the interest rate, the rate of depreciation of the asset, and tax regulations. What would be paid to rent this capital if a rental market existed for it.



 

 

 

 

 

 

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