Depreciation in the Cash Flow Statement of Manufacturing Firms: Amount Incurred or Amount Expensed?

Cash flow from operations is an important figure in the cash flow statement, and the treatment of depreciation on manufacturing plant and equipment will affect its calculation. Depending on the availability of information and whether the adjustment for the change in inventories includes or excludes capitalized depreciation, the depreciation adjustment can be: 1. the amount of depreciation incurred for the period, whether expensed or capitalized in inventories, or 2. the amount of depreciation expensed for the period, whether as a separate expense line item and/or as part of the cost of goods sold or selling and administrative expenses. Both approaches are applicable under either the direct or indirect methods of deriving cash flow from operations. The overall results are the same under either approach.