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Technology Stocks : Micron Only Forum
MU 230.24+2.5%Nov 26 3:59 PM EST
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To: Skeeter Bug who wrote (44764)4/5/1999 11:54:00 PM
From: Peter Dierks  Read Replies (2) of 53903
 
Skeeter Bug:

Perhaps it would assist your to have depreciation explained more fully. Being an accountant I feel qualified to do that.

First you buy a depreciable asset (equipment, goodwill, intellectual property rights, etc.). Next you increase (debit) an asset account and set up a depreciation schedule based on the estimated life of the asset. Each year you hold the asset up to the life it you debit an expense (depreciation expense) and credit accumulated depreciation. The problem is that your financials may reflect a loss when you actually have a positive cash flow (or a small profit when you have a huge positive cash flow). Since the outlay of cash came at the front end the depreciation is called a non-cash expenditure and if you examine the financials you will find that fact detailed on the cash flow statement.

Here is a sample depreciation table using simple straight line depreciation. For interest we will scrap it after year 4
$ out depr ex acc depr Net asset
Year 1 1000 100 100 900
Year 2 0 200 300 700
Year 3 0 200 500 500
Year 4 0 200 700 300
Year 5 0 0 0 0
The journal entry at the end of year 5 is: Debit accumulated depreciation for $700 thus zeroing out. Credit asset $1000 thus zeroing it out. Debit loss on scrapping equipment $300 thus balancing the transaction and recognizing that the depreciation life was too long. (The IRS sets certain life classes, in the tech sector they often end up scrapped before fully depreciated.)

I hope that this help you,

Peter

PS often when companies acquire assets they require the infusion of cash, thus borrow it form say a bank, or issue bonds it the market. This leads to the reverse problem of depreciation. There is interest expense that is reflected on the financials, however the principal repayment is not. When you couple the two together they often cancel each other out.
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