Question

Your Discussion should be a minimum of 250 words in length and not more than 450 words. Please include a word count. Following the APA standard, use references and in-text citations for the textbook and any other sources.

For this week's Discussion:

Discuss the impact of depreciation expense on the cash flow analysis of a capital project. Also, discuss the types of leasing arrangements and their pros and cons relating to depreciation expense.

Answer 1

Depreciation directly impact the amount of cash flow generated by a business, but it is tax-deductible, and so will reduce the cash outflows related to income taxes. Depreciation is considered a non-cash expense, since it is simply an ongoing charge to the carrying amount of a fixed asset, designed to reduce the recorded cost of the asset over its useful life. When creating a budget for cash flows, depreciation is typically listed as a reduction from expenses, thereby implying that it has no impact on cash flows. Nonetheless, depreciation does have an indirect effect on cash flow.

When a company prepares its income tax return, depreciation is listed as an expense, and so reduces the amount of taxable income reported to the government (the situation varies by country). If depreciation is an allowable expense for the purposes of calculating taxable income, then its presence reduces the amount of tax that a company must pay. Thus, depreciation affects cash flow by reducing the amount of cash a business must pay in income taxes.

Types of leasing arrangements :

1. Common Elements : Any lease agreement must fully identify all parties to the transaction, including any with subsidiary or secondary claims, and the asset being leased, including descriptions of real estate or equipment. Terms and conditions must specify the length of the lease, amount and options for payment, responsibility for maintenance and repair, provisions for default and other terminations. It also should state what laws govern the agreement.
2. Real Estate : A real estate lease requires the legal description of the property and its use, whether residential or commercial. A business lease should be in the name of the corporation or company, both lessor and lessee, and be signed by appropriate officers of each entity. It should cover such items as payment for utilities, trash disposal, building repairs and special conditions such as licenses from municipal and state regulatory agencies for the use.

3. Equipment and Machinery : Equipment and machinery agreements are similar to vehicle leases, but may include such special options as varying payments to conform to seasonal usage or to defer payments until a specific task is completed. These also must detail the equipment involved and include any restrictions on operation, such as commercial driver or heavy equipment operator licenses.

4. Licenses : A licensing agreement is a form of lease, giving a user the right to use music, artwork, computer code or similar intangible property for a specified purpose or time, with a fee or royalty. Licensing agreements may be open-ended, for continuing regular use, or for one specific application or performance. A business generally will have license agreements for computer systems and similar equipment.