30 March 2011

The difference between Amortization and Depreciation in Cash Flow Statement

Cash is the most important asset of a company. A good company has the able to convert its goods and services into cash as fast as possible. Besides producing cash from its goods and services, non-cash item such as depreciation and amortization are also considered as cash in the cash flow statement. This is one of the major reason why some companies are able to give dividend to its shareholders even though the company did not get any profit in that particular fiscal year. As a result, we should put much attention on both amortization and depreciation when we want to analysis and predict the cash flow condition of a particular company.

According to investopedia.com, although both of them, depreciation and amortization, are used interchangeably, technically, we should use depreciation and amortization to describe tangible assets, e.g. properties, plant and equipment, and intangible assets, e.g. good will, trademark, respectively.

Nevertheless, as an investor instead of an accountant, it looks like both of them are the same thing because what I need to know is the sum of them and how long of them in such a way that I can predict the condition of the company in the future.

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Written by: Xaivier Chia

Source: http://www.investopedia.com/terms/a/amortization.asp


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