They're usable over two years.

So I'll just write down the number first.

Really, in my mind, it's very similar to depreciation.

So therefore, I put it down there.

Well, you know depreciation, man.

And then at the end of 2010, it'll say the machine is worth nothing.

To figure out the cash from operations from actually how much cash the operations are producing.

So no cash went out of the door.

And then their SG amp A is the same.

If you divide 50,000 by 4, it's 12,500.

No, we didn't.

And amortizing really just means spreading out the cost of this asset, just like depreciation was spreading out the cost of a physical asset.

So 20,000 over 3 years is the life of that truck.

So I used half of it in year one.

Our profit, once again, is 30,000.

Thank you.

And then instead of having an equipment expense, instead of having that expense, they'll have an equipment depreciation expense.

amortization. Amortization is to spread out a non tangible cost over a period of time.

So for example, depreciation, this was factory equipment, and it gets old as I use it, so I spread out its cost.

Accounts Receivable, that they're not changing over the course of the year.

And then the other 250,000 essentially went to an expense called depreciation, which is right there.

Nothing fancy.

Redemption

So the way you'd think about this is instead of having factory retooling, you could say factory tool.

So, for example, in this one, at the beginning of the period, before the 2007 income statement, the asset was worth 50,000.

And we'll talk later about depreciation and amortization and how we might change what these values are, but a very simple way is, if you went out and bought 10 million worth of stuff, you'd write on your books, I have a 10 million asset.

And let's say we do a straight line depreciation, which means we essentially depreciate the asset evenly over its lifespan.

Our starting cash was 50,000, we had 50,000 from operations, now our ending cash is 100,000.

Alright?

And then we have depreciation, and we want to think a little bit in this video, what does the depreciation do to the cash flow statement?

The fact that this machine right here that cost 50,000 is used for in this example, in the depreciation video, it was usable for two years.

And this is just an arguably long winded way of saying that the way you account for this is you spread out the cost over time, over its useful life, and this spreading out is called the depreciation of an asset.

I'll give you some examples.

And there's all sorts of intangible assets that you might amortize.

We know how much it takes to build our product.

The price of this book has been reduced by half.

The value of this book has been halved.

Let's say there's very little labor at my factory.

So this is the same thing. So I said 3 and, 750,000 cupcakes and my cost was a 1.05.

(GUNSHOT)

Today as the spike in the price of oil

lifespan of this machine really is four years, then it's time to go buy another machine and start doing this all over again.

So it actually computes what we need it to compute.

I should be doing this in red, I'm not being consistent.

This is the interest rate you assume.