The Daily Technical #34: Walk me through the three financial statements.

Good morning. Welcome to the 34th edition of The Daily Technical. You’re here for one reason so let’s dive in.

First time reading? Sign up here.

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

Depreciation is a non-cash item recorded on the income statement, impacting profit but not actual cash flow.

Despite being non-cash, depreciation is tax-deductible. This means it lowers taxable income, thereby reducing the overall tax liability for a company.

This leads to a higher net income than if depreciation were ignored.

Common Mistakes

1. Forgetting that while depreciation doesn't involve cash, it still affects taxes. Always incorporate its tax impact on net income.

2. Confusing Cash Flow Statements with Income Statements: Students sometimes mix these up, thinking depreciation impacts cash flow directly. Remember, it adjusts profit, not cash.

3. Overcomplicating the Explanation: Stick to the basics and avoid diving too deep into unnecessary accounting jargon or the initial purchase details during your initial explanation.

Key Takeaways / TLDR

• Depreciation is non-cash but crucial as it reduces taxable income and the tax expense.

• It increases net income by lowering the tax liability.

• Always separate the income statement effects from the cash flow statement details.

TODAY’S QUESTION
Walk me through the three financial statements.

Type your answer here. Within 90 seconds you’ll have custom feedback in your inbox.

THAT’S A WRAP
Before You Go: Are you in a finance club?

We’re partnering with clubs to provide their members with free access to our beta. Here’s a link to our partnership page.

If your club is interested simply fill out the form on our partnership page (it’s towards the bottom under “How to Get Started”) or reply to this email!

See you tomorrow,

The HirePrep Team