What is the effect of depreciation on working capital?
Practice Questions
1 question
Q1
What is the effect of depreciation on working capital?
Increases working capital
Decreases working capital
No effect on working capital
Depends on the method of depreciation
Depreciation does not directly affect working capital as it is a non-cash expense.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of depreciation on working capital?
Solution: Depreciation does not directly affect working capital as it is a non-cash expense.
Steps: 5
Step 1: Understand what working capital is. Working capital is the money a company has available to run its day-to-day operations.
Step 2: Know what depreciation means. Depreciation is the reduction in value of an asset over time, like equipment or buildings.
Step 3: Recognize that depreciation is a non-cash expense. This means it does not involve actual cash leaving the company.
Step 4: Realize that since depreciation is a non-cash expense, it does not directly change the amount of cash or current assets available for working capital.
Step 5: Conclude that while depreciation affects the value of assets on the balance sheet, it does not directly impact the working capital calculation.
