Charlie Parker president of Spinners Company has recently no

Charlie Parker, president of Spinners Company, has recently noted that depreciation increases cash provided by operations and therefore depreciation is a good source of funds. Explain why Mr. Parker is incorrect

Solution

Depreciation is a charge for wear & tear for the use of fixed assets.

The cost of asset incurred at anytime is divided in the period of its usage(Useful life).

It is merely a transfer of past cost incurred to profit and loss account. It does not involve any cash outlay.

Hence it is a non cash expense and is not a source of fund.

So Mr parker is incorrect.