Motli was waiting for me back at the office with a hot cup of mud and cruller. She got one look at my blood-soaked hand and passed out. Sometimes she was such a dame. I put her on the couch and shoved some smelling salts under her nose. "C'mon, Motli, it's just a scratch. Come talk to me while I disinfect this, huh?"

She stayed outside the bathroom, yelling more numbers at me while I washed and re-bandaged the Wire's handiwork. "Motli, dammit, just cut to the chase, would ya? I don't understand those stinkin' financial reports."

"Most people don't, Acey. That's what we're trying to rectify here. If you're going to invest in a company you have to know what the numbers mean..."

I stuck my head around the corner. "Don't make me speak harshly to you, Motli. You can sit there and scream numbers at me until your purple eye shadow runs down your face -- once this case is solved. For now...upshots. Give me upshots."

She gave me the basset hound look she gets when she doesn't get her way, like she was taking my disinterest in the numbers personally. "Okay, you poop. No IPO's, no stock sales, no bond sales...nothing in Techtek's package that indicates any positive cash flow except what I told you about. But... hello? This is odd. Here's an upshot, Acey. It looks to me like they used the money from the sale of their equipment to pay a dividend to their shareholders."

"I thought dividends were good."

"For the shareholders, they are," she said. "But this is a company making no money and not growing in any substantial way for a couple of years, initiating a dividend. Usually a dividend is a reward to shareholders when a company is doing well. Unless it's just to look good to ignorant investors who don't read the numbers."

"So all that brand new equipment in the factory just appeared out of thin air, unaccounted for, anywhere? This whole thing is starting to stink like a gym sock. I think I'll call...."

That was as far as I got before she did the basset face again, silently scolding me for being an inattentive pupil. Desperate to avoid one of her protracted crying jags I looked over her shoulder and pointed at a big fat '70' listed next to the biggest word I could find on the statement of cash flow. It said 'Depreciation - 70.' Hell, even I knew enough to know that that meant 70 million. "I'm trying to figure out where their money is coming from, Motli. Does this mean they're taking in $70 million from something called depreciation?"

"No, ya big lug," she said, rolling her eyes. That's not what depreciation is. It's something that's added back to net income when you're calculating operating cash flow."

I could feel my brain atrophy, but I figured she was going to explain it anyway. I was right.

The reason depreciation is added back to net income to calculate operating cash flow is that:

1) Depreciation is a source of cash.

2) Depreciation neither supplies nor uses cash, but is a subtraction in calculating net income, so adding it back is necessary to move from net income to operating cash flow.

3) Depreciation is not shown on the income statement, and so must be added back because it uses cash.

4) Net cash provided by operations does not include expenses.

Cash flow statement information provided by Joe Louderback.

The answer is 2) Depreciation neither supplies nor uses cash, but is a subtraction in calculating net income, so adding it back is necessary to move from net income to operating cash flow.

Depreciation is a term that confuses the masses while keeping accountants busy. When a company buys a long-term asset, rather than take the cost as a one-time hit, the accountants break down the expense over the useful life of the asset. Hypothetically speaking, while Techtek may have bought a $5 million piece of machinery, even if they paid for it completely at the time of purchase, depreciation kicks in.

If the company believes the machinery will be useful for 3 years and will then be sold off for $2 million, then every year, a third of the difference (which is to say a third of $1 million) will be expensed. This is the traditional method of calculating the amortization, known as straight-line depreciation. Then basically the machinery will cost the company $3 million over its three-year life and will be taken out in quarterly chunks.

So, why is depreciation being added to cash flow? Well, again, it is being subtracted in every quarterly report's income statement but it is a phantom expense. That money went out when the assets were first bought.

So depreciation does not use cash, nor does it supply cash. However, as a non-cash expense in the income statement it overstates the amount of cash the company used to pay expenses. That is why it gets added in the cash flow statement.

Motli put the report on my desk and smacked her hands together thrice to indicate a job well done. Nothing she'd said meant diddly to me, but she was happy. "Thanks, Motli. That was just stimulating. Now, can you think of any reason this case might tie into my dad's murder?"

Happy didn't last long. Instantly, a stream of mascara tears ran down Motli's face. She and my dad had been close, real close. No, not THAT close. But my dad...well...when he ran the office he ALWAYS listened to the numbers. He'd disappeared some years back on a case. All the cops ever found was his battered fedora, a puddle of blood leading off a pier, and his left hand. "I'm sorry, Mot. I know Jack meant a lot to you. But Sgt. Raymond said something about he doesn't want me working on my dad's case, and I can't figure what one has to do with the other. I guess...I guess I'm gonna have to start talking to my old contacts again, Mot." The poor girl was having a full-on weep. I had to distract her.

"Motli -- enough of that! We have work to do. Get me the file on dad's case and let's go trolling for clues, huh?"

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