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Salvage value Depreciation

In simple words we can say that depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors.
In accounting, depreciation is a term used to describe any method of attributing the historical or purchase cost of an asset across its useful life, roughly corresponding to normal wear and tear. [1It is of most use when dealing with assets of a short, fixed service life, and which is an example of applying the matching principle per generally accepted accounting principles. Depreciation in accounting is often mista enly seen as a basis for recogni!ing impairment of an asset, but unexpected changes in value, where seen as significant enough to account for, are handled through write"downs or similar techniques which ad#ust the boo value of the asset to reflect its current value. $herefore, it is important to recogni!e that depreciation, when used as a technical accounting term, is the allocation of the historical cost of an asset across time periods when the asset is employed to generate revenues. $his process of cost allocation has little or no direct relationship to the mar et value or current selling price of the asset, it is simply the recognition that a portion of the asset%s cost""the portion that will never be recuperated through re"sale or disposal of the asset""was &used up& in the generation of revenues for that time period.

Cash flow
'ash flow refers to the movement of cash into or out of a business, or pro#ect, or financial product. It is usually measured during a specified, finite period of time. (easurement of cash flow can be used

to determine a pro#ect%s rate of return or value. $he time of cash flows into and out of pro#ects are used as inputs in financial models such as internal rate of return, and net present value. to determine problems with a business%s liquidity. )eing profitable does not necessarily mean being liquid. * company can fail because of a shortage of cash, even while profitable. as an alternate measure of a business%s profits when it is believed that accrual accounting concepts do not represent economic realities. +or example, a company may be notionally profitable but generating little operational cash ,as may be the case for a company that barters its products rather than selling for cash-. In such a case, the company may be deriving additional operating cash by issuing shares, or raising additional debt finance. cash flow can be used to evaluate the %quality% of Income generated by accrual accounting. .hen /et Income is composed of large non"cash items it is considered low quality. to evaluate the ris s within a financial product. 0.g. matching cash requirements, evaluating default ris , re"investment requirements, etc.

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and so on. 0lement Data 2ource /et Income 'urrent Income 2tatement 3 Depreciation4*morti!ation 'urrent Income 2tatement 6rior 7 'urrent )alance 2heets: 'urrent *ssets and 8iability 5 'hanges in . 6lant and 0quipment 5 'apital 0xpenditure accounts 9 +ree 'ash +low /ote that the first three lines above are calculated for you on the standard 2tatement of 'ash +lows. acquisitions and long"life assets-.or ing 'apital accounts 6rior 7 'urrent )alance 2heets: from 1perations .+'+.or ing 'apital accounts 9 'ash +lows 5 1perations same as 2tatement of 'ash +lows: section 1. It includes cash earnings plus changes to wor ing capital. convertible security holders. $hey include equity holders. debt holders. Investment cash flows: 'ash received from the sale of long"life assets. share repurchases or debt repayments Free cash flow +ree cash flow .Cash flows are classified into: • • • Operational cash flows: 'ash received or expended as a result of the company%s internal business activities. 1ver the medium term this must be net positive if the company is to remain solvent. or paid out as dividends. Financing cash flows: 'ash received from the issue of debt and equity. or spent on capital expenditure .is cash flow available for distribution among all the securities holders of an organi!ation. 0lement Data 2ource /et Income 'urrent Income 2tatement 3 Depreciation4*morti!ation 'urrent Income 2tatement 6rior 7 'urrent )alance 2heets: 'urrent *ssets and 8iability 5 'hanges in . preferred stoc holders.

*morti!ation is recorded in the financial statements of an entity as a reduction in the carrying value of the intangible asset in the balance sheet and as an expense in the income statement.*morti!ation In accounting. * corresponding concept for tangible assets is depreciation. (ethodologies for allocating amorti!ation to each accounting period are generally the same as for depreciation.often intellectual property such as patents and trademar s or copyrights. . obsolescence or other decline in value as a result of use or the passage of time. many intangible assets such as goodwill or certain brands may be deemed to have an indefinite useful life and are therefore not sub#ect to amorti! a systematic manner over their estimated useful economic lives so as to reflect their consumption. :owever. amorti!ation refers to expensing the acquisition cost minus the residual value of intangible assets . expiration.