The Daily Technical #33: If depreciation is a non-cash expense, how does it affect net income?

Good morning. Welcome to the 33rd edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What is the difference between cost of goods sold and operating expenses?

COGS represents the direct costs associated with the production of the goods sold or the delivery of services to generate revenue. Examples include direct material and labor costs.

Operating expenses such as SG&A and R&D are not directly associated with the production of goods or services offered. Often called indirect costs, examples include rent, payroll, wages, commissions, meal and travel expenses, advertising, and marketing expenses.

Common Mistakes

1. Mixing Up Direct and Indirect Costs. Many students confuse COGS with operating expenses, thinking anything related to production fits under operating expenses.

2. Overlooking Examples. Use relatable examples, like distinguishing between advertising (an operating expense) and materials (COGS).

3. Assuming All Business Costs Are the Same. Differentiate them based on how closely they are tied to production.

Key Takeaways / TLDR

• COGS are direct costs tied to production, while operating expenses are indirect costs related to running the business.

• Always associate COGS with direct costs, such as raw materials, and operating expenses with indirect costs, like advertising.

TODAY’S QUESTION
If depreciation is a non-cash expense, how does it affect net income?

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THAT’S A WRAP
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The HirePrep Team