Depreciation & Amortization: The Non-Cash Charges That Drive Deals

Concept

Depreciation and amortization are non-cash expenses that allocate the cost of long-term assets over their useful lives. Depreciation applies to tangible assets like machinery and buildings. Amortization applies to intangible assets like patents and acquired customer relationships. Neither involves cash leaving the company—they simply reduce book value and taxable income over time.

Intuition

Think of it mechanically: you buy a machine for $1M that lasts 10 years. Expensing the full $1M in year one would crush earnings and misrepresent ongoing profitability. Spreading $100K per year matches the expense to the revenue the machine generates. The cash is already gone—D&A just tells accounting to remember it happened. This is why D&A gets added back in cash flow: it's a non-cash charge that reduced net income but didn't touch the bank account.

Components

Interview Script

Depreciation and amortization are non-cash expenses that allocate the cost of long-term assets over their useful lives—depreciation for tangible assets like machinery, amortization for intangibles like patents. The key is matching: if you buy a $1 million machine lasting 10 years, expensing it all upfront would distort profitability, so you spread $100K annually to match the expense to the revenue it generates. Since the cash already left when you bought the asset, D&A gets added back on the cash flow statement—it reduced net income but didn't actually touch the bank account.