Hi Mukesh,
Hope you are safe and well. Was this problem taken out from CMA exam support question pack provided by IMA?
This is what I conceptually understand about the use of depreciation and the depreciation tax shield in any given Cash Flow computation problem in CMA- P2.
a) if the problem states "pre-tax cash flows", you'll have to add back the depreciation Tax Shield Effect only to the given cash flow.
b) if the problem states 'after-tax cash flow', the tax shield effect of depreciation is already considered (working from the net income to cash - indirect method) and hence we only need to add back the total depreciation amount.
On the accounting concept of why we need to add back depreciation:
As the depreciation is taken out when calculating net profit and it is not a cash expense, depreciation is added back while calculating the cash flow statement using indirect method.
In a nutshell, depreciation is an accounting measure and added back to revenue or net sales while calculating the company's cash flow. Due to this depreciation does not impact the cash.
However, depreciation does have an indirect impact on cash flow. Depreciation can only be presented in a cash flow statement when it is prepared using indirect method.
Having said that I am still a learner of these concepts and happy to stand corrected
I look forward to your continued exchange of thought provoking subject related questions like these , that make learning mutually participating with some 'aha' moments.
Which you good luck in your CMA Certification Exam(s)
Kind regards
Srirama