Non-Cash Charges

Depreciation and Amortisation

The importance of depreciation and amortization lies in the very essence of the relationship between securities and the assets of companies. According to Hall (2001, p.1185) the price of securities, including shares, represent the assets of the particular companies. These assets include both tangible-, and, in the past decade growing in importance, intangible assets.

There are two very important accounting entries that needs to be highlighted; depreciation and amortization. They are called “non-cash charges”, because they, in reality, are not cash expenditures. Depreciation is useful for tax reduction purposes. What depreciation is, that it breaks down its capital expenditures, and spreads it over a longer time period. It is not unusual that depreciation of real assets exist years after it has been actually paid for. For these reasons, during the observation of financial statements, depreciation should not be considered, if the aim is the operating financial performance analysis.

Amortization is used when a company acquires the other. If the company is purchased for a higher amount than what the shareholder’s equity, the total worth of the shares, than the excessive number is considered to be the goodwill of the company, and it is also spread, amortized, over a longer period of time.

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