Real-world examples of impact of depreciation on cash flow statement

Before we get into specific examples of impact of depreciation on cash flow statement example scenarios, let’s anchor the basic idea in one sentence:

Depreciation reduces reported net income, but because it does not involve current-period cash outflow, it is added back to net income in the operating section of the cash flow statement.

That sounds textbook. Let’s make it practical.

Example of a small business: one delivery van, big cash flow swing

Imagine a small delivery business in the U.S. buys a van for $50,000 in January 2025, paid fully in cash. The owner uses straight‑line depreciation over 5 years, no salvage value.

• Initial cash outflow (investing): $50,000 in 2025
• Annual depreciation expense: $10,000 per year

Assume in 2025 the business earns $20,000 before depreciation and tax, and we’ll ignore tax for the moment to keep the math clean.

Income statement 2025

• Revenue minus cash operating expenses: $20,000
• Less depreciation: $10,000
• Net income: $10,000

Cash flow from operating activities (indirect method)

• Net income: $10,000
• Add back depreciation: +$10,000
• Operating cash flow: $20,000

Cash flow from investing activities

• Purchase of van: \((50,000)\)

Net change in cash 2025

• Operating: +$20,000
• Investing: \((50,000)\)
• Net: \((30,000)\)

This is one of the cleanest examples of examples of impact of depreciation on cash flow statement example analysis:

• Depreciation decreases net income by $10,000.
• Depreciation increases operating cash flow by $10,000 (because it is added back).
• The real cash hit happened once, in investing activities, when the van was purchased.

If you looked only at net income, you’d miss that the business actually generated $20,000 of operating cash. The depreciation adjustment in the cash flow statement fixes that.

Manufacturing company: accelerated depreciation vs straight‑line

Now let’s move to a mid‑size manufacturing company investing in new machinery in 2024, a very realistic example of how tax rules and accounting choices affect cash flow.

The company buys equipment for $1,000,000. Two scenarios:

• Scenario A: Straight‑line over 10 years → $100,000 depreciation per year.
• Scenario B: Accelerated method (like double‑declining balance) → $200,000 depreciation in year 1, declining later.

Assume pre‑depreciation, pre‑tax profit is $400,000 each year, and the tax rate is 25%.

Scenario A: Straight‑line

Year 1 income statement:

• Profit before depreciation and tax: $400,000
• Depreciation: $100,000
• Profit before tax: $300,000
• Income tax (25%): $75,000
• Net income: $225,000

Cash flow from operating activities (indirect):

• Net income: $225,000
• Add back depreciation: +$100,000
• Operating cash flow: $325,000

Scenario B: Accelerated depreciation

Year 1 income statement:

• Profit before depreciation and tax: $400,000
• Depreciation: $200,000
• Profit before tax: $200,000
• Income tax (25%): $50,000
• Net income: $150,000

Cash flow from operating activities:

• Net income: $150,000
• Add back depreciation: +$200,000
• Operating cash flow: $350,000

Same equipment, same cash paid up front, different depreciation method.
Year 1 operating cash is \(25,000 higher under accelerated depreciation, even though net income is \)75,000 lower.

This is one of the best examples of impact of depreciation on cash flow statement example situations:

• Depreciation itself is non‑cash.
• But higher early depreciation lowers taxable income, which lowers cash taxes paid, which increases operating cash flow.

This is why many capital‑intensive businesses care less about reported earnings and more about cash flow and tax depreciation schedules. For an overview of U.S. tax depreciation rules, the IRS provides detailed guidance in Publication 946 (irs.gov).

Tech company in 2024: cloud servers, AI hardware, and impairments

Now let’s look at a modern 2024 example of examples of impact of depreciation on cash flow statement example in the tech sector.

A fast‑growing AI platform invests $500 million in specialized GPU servers and data center equipment. Management expects to use them heavily for 5 years, so they set straight‑line depreciation over that period.

Year 1:

• Capital expenditure: $500 million cash outflow (investing section).
• Depreciation expense: $100 million on the income statement.
• Depreciation added back: +$100 million in operating cash flow.

So far, this looks textbook. But in year 2, new chips come out, and the old equipment’s value drops sharply. Management records a $150 million impairment on top of regular depreciation.

Year 2 income statement includes:

• Depreciation: $100 million
• Impairment loss: $150 million (non‑cash)
• Total reduction to net income: $250 million

Cash flow from operating activities (indirect method):

• Start with net income (significantly lower due to impairment)
• Add back depreciation: +$100 million
• Add back impairment: +$150 million
• Operating cash flow is much higher than net income suggests.

This kind of situation appears in real examples from large tech firms when they write down data center assets or acquired technology. The impairment, like depreciation, is non‑cash in the current period, so the cash flow statement reverses its impact on net income.

For readers who want to go deeper into how impairments and depreciation interact, the Financial Accounting Standards Board (FASB) hosts standards and explanations at fasb.org.

Retail chain: same cash flow, different depreciation policy

Here’s a simpler, very practical example of impact of depreciation on cash flow statement example that shows how policy choices affect presentation more than cash.

Two retail chains, StoreCo and ShopMart, each open 10 new stores in 2024 and spend $20 million on fixtures and leasehold improvements.

• StoreCo depreciates over 10 years.
• ShopMart depreciates over 8 years.

In 2024:

• StoreCo depreciation: $2 million
• ShopMart depreciation: $2.5 million

If both chains have $10 million of cash operating profit before depreciation and tax, then:

StoreCo income statement

• Profit before depreciation and tax: $10 million
• Depreciation: $2 million
• Profit before tax: $8 million

ShopMart income statement

• Profit before depreciation and tax: $10 million
• Depreciation: $2.5 million
• Profit before tax: $7.5 million

Assuming no tax for simplicity, ShopMart reports lower net income. But on the cash flow statement, both companies will:

• Start with net income.
• Add back their respective depreciation amounts.

If there are no other differences, operating cash flow is the same for both, even though net income is different. This is one of the cleaner real examples that highlights why analysts lean so heavily on cash flow metrics when comparing companies.

Logistics company: maintenance capex vs depreciation in 2025

Let’s bring in a 2025‑style scenario with a logistics company running a large fleet of trucks.

Key numbers for the year:

• Depreciation expense on trucks: $40 million
• New truck purchases (capital expenditures): $60 million
• Net income: $30 million

Operating section (indirect):

• Net income: $30 million
• Add back depreciation: +$40 million
• Operating cash flow: at least $70 million, before working capital changes.

Investing section:

• Purchase of trucks: $(60) million

Net cash impact from trucks:

• Operating: +$40 million from adding back depreciation
• Investing: $(60) million from actual cash outflow
• Net: $(20) million cash related to the fleet

This is a very realistic example of examples of impact of depreciation on cash flow statement example in asset‑heavy industries:

• Depreciation boosts operating cash flow.
• But if capital expenditures are higher than depreciation, the fleet is actually a net cash drain overall.

Analysts often compare depreciation to capital expenditures to see whether a company is just maintaining its asset base or aggressively expanding it. That ratio can matter more than the depreciation method itself.

Energy company: tax shields and free cash flow

Consider a utility company investing $5 billion in renewable energy assets between 2024 and 2026. These projects often qualify for accelerated tax depreciation and tax credits.

In early years:

• Accounting depreciation might be moderate (e.g., 20‑year straight‑line).
• Tax depreciation might be front‑loaded, creating a tax shield.

Even though the cash flow statement you see in published financials is based on accounting depreciation, the tax line reflects the benefit of accelerated tax depreciation.

Here’s how it plays out in the cash flow statement:

• Depreciation expense (accounting) is added back to net income in operating cash flow.
• Lower cash taxes paid (because of accelerated tax depreciation) further increases operating cash flow.
• Massive capital expenditures show up as large negative cash flows in investing activities.

This is another example of impact of depreciation on cash flow statement example where the income statement looks weak (high depreciation, high interest), but the operating cash flow is relatively strong because tax payments are lower.

If you’re interested in how large U.S. energy companies report these effects, the U.S. Securities and Exchange Commission’s EDGAR database is a good source of real examples: sec.gov/edgar.

SaaS company: low depreciation, high cash, and investor perception

Not all examples of examples of impact of depreciation on cash flow statement example are about heavy industries. Consider a software‑as‑a‑service (SaaS) company in 2024.

Key traits:

• Limited property, plant, and equipment.
• Most spending is on people and cloud services (expensed as incurred).
• Depreciation expense is relatively small.

In a typical year:

• Net income: slightly positive or even negative.
• Depreciation: small, maybe 3–5% of revenue.
• Operating cash flow: often higher than net income because of non‑cash items (stock‑based compensation, some depreciation, amortization of capitalized software).

Here, depreciation still appears in the reconciliation from net income to operating cash flow, but it is not the main driver. This is an example of impact of depreciation on cash flow statement example where the adjustment is less important than other non‑cash items.

Investors in these companies often focus on metrics like “free cash flow margin,” where depreciation and capital expenditures matter, but in a much smaller way than in manufacturing or energy.

Pulling it together: patterns across all the examples

Looking across these examples of examples of impact of depreciation on cash flow statement example, a few patterns repeat:

• Depreciation always reduces net income but is then added back in operating cash flow under the indirect method.
• The real cash impact of an asset purchase appears as a capital expenditure in the investing section, often long before the depreciation hits the income statement.
• Different depreciation methods change the timing of expense recognition and tax payments, which can shift operating cash flow between periods.
• In asset‑heavy sectors (manufacturing, logistics, energy), depreciation is a major line item in the reconciliation from net income to operating cash flow.
• In asset‑light sectors (SaaS, some services), depreciation is still there, but it’s a smaller part of the story.

If you want a structured refresher on how the three main financial statements connect, including the cash flow statement, the Corporate Finance Institute has a helpful overview: corporatefinanceinstitute.com.

FAQ: real examples and common questions on depreciation and cash flow

What are some real examples of how depreciation affects the cash flow statement?

Real examples include:

• A trucking company buying a fleet of vehicles: large upfront cash outflows in investing, followed by years of depreciation added back in operating cash flow.
• A tech firm writing down obsolete servers: big non‑cash impairment and depreciation charges reduce net income but are added back in operating cash flow.
• A utility using accelerated tax depreciation: higher early depreciation lowers cash taxes, boosting operating cash flow.

Each example of depreciation’s impact shows the same pattern: non‑cash expense on the income statement, reversal in the operating section of the cash flow statement.

Can depreciation ever reduce cash flow from operations?

In the mechanics of the indirect cash flow statement, depreciation itself is always added back, so it does not directly reduce operating cash flow. However, higher depreciation can reduce taxable income, which can lower cash taxes paid and actually increase operating cash flow. The real cash outflows are the capital expenditures that create the depreciable assets.

Why do analysts compare depreciation to capital expenditures?

Because it’s a quick way to see whether a company is:

• Merely replacing worn‑out assets (capex roughly equal to depreciation), or
• Expanding aggressively (capex far above depreciation), or
• Under‑investing (capex below depreciation).

In many of the best examples of impact of depreciation on cash flow statement example analysis, this comparison tells you whether today’s cash flow is being “bought” by under‑investing in the future.

Is depreciation treated differently under the direct method of the cash flow statement?

Under the direct method, you show actual cash receipts and cash payments, so depreciation does not appear as a separate line in operating activities. But if a company uses the direct method, it must still provide a reconciliation from net income to operating cash flow, and depreciation will be added back there. So the economic effect is the same as in all the examples of examples of impact of depreciation on cash flow statement example discussed above.

The bottom line: depreciation is an accounting bridge between the income statement and the cash flow statement. It never moves cash by itself, but it constantly reshapes how we explain where the cash came from and where it went.