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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 mistaenly

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 maret 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 netpresent 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 whileprofitable.

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 bederiving 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 riss within a financial product. 0.g. matching cash requirements,

evaluating default ris, re"investment requirements, etc.

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Cash flows are classified into:

Operational cash flows: 'ash received or expended as a result of the company%s internal

business activities. It includes cash earnings plus changes to woring capital. ver themedium term this must be net positive if the company is to remain solvent.

Investment cash flows: 'ash received from the sale of long"life assets, or spent on

capital expenditure investments, acquisitions and long"life assets-.

Financing cash flows: 'ash received from the issue of debt and equity, or paid out as

dividends, share repurchases or debt repayments

Free cash flow

+ree cash flow +'+- is cash flow available for distribution among all the securities holders of an

organi!ation. $hey include equity holders, debt holders, preferred stoc holders, convertible

security holders, and so on.

0lement Data 2ource

/et Income 'urrent Income 2tatement

3 Depreciation4*morti!ation 'urrent Income 2tatement

5 'hanges in oring 'apital 6rior 7 'urrent )alance 2heets: 'urrent *ssets and 8iabilityaccounts

5 'apital 0xpenditure6rior 7 'urrent )alance 2heets: 6roperty, 6lant and 0quipment

accounts

9 +ree 'ash +low

/ote that the first three lines above are calculated for you on the standard 2tatement of 'ash

+lows.

0lement Data 2ource

/et Income 'urrent Income 2tatement3 Depreciation4*morti!ation 'urrent Income 2tatement

5 'hanges in oring 'apital6rior 7 'urrent )alance 2heets: 'urrent *ssets and 8iabilityaccounts

9 'ash +lows 5 perations same as 2tatement of 'ash +lows: section 1, from perations

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*morti!ation

In accounting, amorti!ation refers to expensing the acquisition cost minus the residual value of

intangible assets often intellectual property such as patents and trademars or copyrights- in asystematic manner over their estimated useful economic lives so as to reflect their consumption,

expiration, obsolescence or other decline in value as a result of use or the passage of time.

* corresponding concept for tangible assets is depreciation. (ethodologies for allocatingamorti!ation to each accounting period are generally the same as for depreciation. owever,

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!ation.

*morti!ation is recorded in the financial statements of an entity as a reduction in the carryingvalue of the intangible asset in the balance sheet and as an expense in the income statement.