please elaborate on the relation between free cash flow FCF & depreciation expense.



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why we need to remove depreciation expense to come to FCF. please explain with numerical example.

2 Answer(s)


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Depreciation is a kind of expense for which payment is not made in cash rather, it is only a book entry to decrease the value of assets and recognise it as expenses for the period on account of use of asset for its wear and tear.

Not only depreciation any kind of expenses which is not paid in cash is to be removed for cash flow.

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Ankur is right. Depreciation is a non-cash expense.

The reason you need the free cash flow of a company is to understand how much cash does the company generate. To accurately measure that you should only subtract cash expenses. Non-cash expenses such as depreciation are only for tax purposes and should not be included in FCF calculation.