Capital spending vs depreciation in a cash forecast

Put equipment payments into the cash forecast on their payment dates and calculate depreciation separately from the asset's cost, useful life and in-service convention. A $18,000 purchase, $300 monthly depreciation and a loan instalment are three different movements. Using the small monthly expense instead of the purchase payment can materially overstate available cash.

Build the purchase payment calendar first

Assume equipment costs $18,000, with a 20% deposit in March and the 80% balance in May. It is available for use on 1 June. There are no other acquisition costs, tax effects, disposals or impairments in this example.

The deposit and balance total $18,000. Recording the deposit and then another $18,000 at delivery overstates cash spending by $3,600. Starting all purchase cash in June misses payments already made in March and May.

Calculate the cash balance independently of depreciation

Assume opening cash of $30,000 and $4,000 operating cash generated each month before equipment and financing payments. Operating cash is already a cash measure; do not subtract depreciation from it again.

By May, $30,000 + $12,000 operating cash − $18,000 equipment payments = $24,000. By June, another $4,000 operating cash takes it to $28,000. A model that deducts only $300 depreciation in place of the purchase would miss almost the entire investment's cash demand.

Calculate the asset expense and carrying amount

Choose a straight-line life of sixty months and zero residual value for this teaching case. Monthly depreciation is ($18,000 − $0) ÷ 60 = $300. With a full-month convention beginning in June, seven months through December give $2,100 depreciation and $15,900 carrying amount, assuming no other asset movements.

These are explicit assumptions, not a recommended accounting or tax life. IAS 16 addresses asset recognition, cost and depreciation. Use the applicable policy for capitalized cost, residual value, useful life and availability for use. The cash payment date alone does not determine those choices.

For a profit-to-cash bridge, add back depreciation already deducted in profit, then show the purchase payments separately. For a direct receipts-and-payments schedule, include the purchase payment once and omit depreciation as a cash payment. IAS 7 distinguishes noncash adjustments from investing and financing cash movements.

Show financing alongside the full purchase

Suppose a $15,000 loan is actually drawn in May. Keep the $18,000 purchase intact and add the draw separately. May closing cash becomes $39,000 instead of $24,000. Do not reduce the asset's price to the amount funded from the owner's cash.

If June's loan payment is $500 principal plus $100 interest, June closing cash becomes $39,000 + $4,000 − $600 = $42,400 in this case. Closing principal is $14,500. Depreciation remains $300 under the stated asset policy. The payment, debt reduction and expense have different roles; linking all three to one $300 line loses that distinction.

Check the purchase decision beyond the first month

Include servicing, staffing, installation downtime and replacement spending where they change the operating case. A fully depreciated asset may still operate; zero carrying value does not mean future replacement costs are zero. A financed asset can leave cash available today while creating later repayment obligations.

Use the debt-service guide for the repayment schedule, the cash forecast for payment dates and the DCF guide when reinvestment feeds a valuation. Keep the accounting policy and the funding calendar visible as separate inputs.