Definition:

Depreciation & Amortization Expense (Cash Flow) refers to the non-cash charges that are added back to net income in the cash flow statement. Depreciation is the allocation of the cost of tangible assets over their useful lives, while amortization is the similar allocation for intangible assets.

Examples

1. A manufacturing company depreciates its machinery over a period of 10 years.
2. A tech company amortizes the cost of its software patents over a period of 5 years.

Formula:

Depreciation & Amortization Expense = Depreciation Expense + Amortization Expense

How to use the metric:

This metric is used in the cash flow statement to adjust net income for non-cash expenses, providing a clearer picture of cash generated by operating activities. It helps investors and analysts understand the cash flow available to the company after accounting for the wear and tear of assets.

Limitations:

1. It does not reflect actual cash outflows, as these are non-cash expenses.
2. Different methods of depreciation and amortization can lead to inconsistencies in financial reporting.
3. It may not accurately represent the economic reality if the useful life estimates are incorrect.

Applies to:

Industries with significant capital investments, such as manufacturing, telecommunications, and utilities, where tangible and intangible assets are prevalent.

Doesn't apply to:

Service-based industries with minimal capital assets, such as consulting or software-as-a-service (SaaS) companies, where depreciation and amortization are less significant.

Summary:

Depreciation & Amortization Expense (Cash Flow) is a crucial non-cash adjustment in the cash flow statement, reflecting the allocation of costs of tangible and intangible assets over time. It is essential for understanding the cash-generating ability of a company, particularly in capital-intensive industries, but may not be as relevant in service-oriented sectors.