Depreciation & Amortization

Straight-line depreciation spreads the cost evenly: Annual Depreciation = (Cost - Salvage Value) / Useful Life. Accelerated methods (double declining balance, MACRS for tax purposes) front-load the expense, creating larger deductions in early years. Most companies use straight-line for book purposes and MACRS for tax purposes, creating a deferred tax liability. In interviews, you should know straight-line and understand why companies might use different methods for book vs. tax.

Intangible assets with finite lives (patents, customer relationships, licenses) are amortized over their useful life, similar to straight-line depreciation. Intangible assets with indefinite lives (goodwill, certain trademarks) are not amortized but tested for impairment annually. In M&A, purchase price allocation creates new identifiable intangible assets that are amortized — this amortization is often added back by analysts because it is a non-cash charge created by the accounting for the deal, not a real economic cost.

Income statement: D&A reduces EBIT and Net Income. Cash flow statement: D&A is added back in the operating section (it's a non-cash charge). Balance sheet: accumulated depreciation reduces the net book value of PP&E; accumulated amortization reduces intangible asset values. The net cash flow impact of a $10 increase in depreciation: Net Income falls by $10 × (1 - tax rate) = $7.50, but cash from operations increases by $10 - $7.50 = $2.50 (the tax savings from the deduction).

EBITDA adds back D&A to show operating performance before these non-cash charges. However, for capital-intensive businesses, ignoring D&A is misleading because the underlying assets must eventually be replaced (CapEx). This is why 'EBITDA minus CapEx' or 'maintenance EBITDA' is sometimes used as a better proxy. In DCF models, D&A is added back in the UFCF calculation, while CapEx is subtracted separately — ensuring the actual cash spend on assets is captured.