Depreciation & Amortization (D&A)
Also called D&A
Depreciation and Amortization are accounting methods used to allocate the cost of tangible and intangible assets over their useful lives.
For example. a factory may be acquired for $500. But, this expense can be amortized over the useful life of the factory. If the factory has a useful life of 20 years, that means $25 in straight-line depreciation. So, $25 will be added to Depreciation & Amortization every year for the next 20 years to account for the expense of acquiring the factory.
D&A is a non-cash expense and affects the financial statements by:
Income Statement: Reduces Net Income. Is the DA in EBITDA
Balance Sheet: Reduces the value of the asset by the annual depreciation value.
Cash Flow Statement: Is added-back to Net Income in Cash Flow from Operations to increase cash since it is a non-cash expense
In the room
D&A is the most common non-cash add-back in interviews, and the reason EBITDA exists at all. Be ready to trace it through all three statements — reduces net income, reduces the asset, gets added back in operating cash flow. It's a standard question.