Depreciation and amortization is the first non-cash expense you met building the income statement. It's also the most-asked linkage item in interviews, because it exercises three ties at once. One number, three appearances:
- IS: an expense. It reduces EBIT, pre-tax income and, through tax, net income. Be careful here. On most real income statements D&A isn't a separate line at all. It's buried inside COGS (depreciation of factory assets) and SG&A (depreciation of offices, amortization of software). So where do you find the total? In the CFS add-back or the PP&E note. Interviewers love candidates who know this.
- CFS: an add-back. The indirect CFO starts from an accrual profit that D&A reduced, but no cash left the building this year. It left years ago, as capex. So you add it back.
- BS: a reduction in net PP&E (mechanically, accumulated depreciation rises, so net PP&E falls).
This add-back trips people into a false belief that's worth killing right away. Depreciation does not "generate cash." All the add-back does is reverse a subtraction that was never cash to begin with. The only cash consequence of depreciation is the tax shield. Because D&A is tax-deductible, it lowers cash taxes by D&A × tax rate. So in the classic $10-at-30% walk, cash ends up by $3 because the taxman took $3 less. Depreciation itself isn't income.
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How does capex turn into future depreciation?
The forward engine. Now bolt T6 onto T4 and you have a machine that runs across years:
This year: Capex leaves via CFI → lands in PP&E (BS grows)
Next years: That PP&E depreciates → D&A expense rises → PP&E shrinks backCapex is tomorrow's depreciation, on a lag. A company investing heavily today is signing up for a heavier D&A line for the next decade. Modelers formalize this with a depreciation waterfall. Each year's capex becomes a layer, each layer depreciates on its own schedule, and total D&A is the sum of the live layers. Here's a quick illustration with ₹100 of capex each year, depreciated straight-line over 5 years (₹20 per layer per year):
| Year | Capex | D&A from Y1 layer | Y2 layer | Y3 layer | Total D&A |
|---|---|---|---|---|---|
| 1 | 100 | 20 | — | — | 20 |
| 2 | 100 | 20 | 20 | — | 40 |
| 3 | 100 | 20 | 20 | 20 | 60 |
With steady capex, D&A climbs toward capex and then levels off. Capex persistently above D&A means the asset base is growing, which is growth investment. Capex persistently below D&A means the base is shrinking or aging, and the company is harvesting itself.
Real-world scale (illustrative, modeled on ~FY24 scale. Pull the actual filings.) Reliance Industries spent on the order of ₹1.3 lakh crore of capex in a recent year, against D&A of roughly ₹50,000 crore. That puts capex ≈ 2.5× D&A. The asset base is compounding fast, and RIL's D&A line is guaranteed to keep climbing for years. Compare TCS, where capex runs a small fraction of CFO and the PP&E engine barely matters to the story. Same three statements, utterly different machines. You can see it purely in T4/T6.
What complicates depreciation in real filings?
Two complications (noted now, taught fully later). For manufacturers, some depreciation is first capitalized into inventory and only hits COGS when the goods sell. So the CFS add-back (total D&A) can exceed the D&A visible in the IS period. You'll get the full story in the long-term-assets module ahead, and in the revenue, receivables and inventory module. Indian balance sheets also show capital work-in-progress (CWIP) separately. Capex first lands in CWIP, then commissions into PP&E, so on a real Indian filing the roll-forward is gross block + CWIP and not net PP&E alone. That wrinkle gets covered in the long-term-assets module ahead too. Neither breaks the logic, but both move the numbers you tie to.