Where Depreciation Hides on the Income Statement

Introduction

Home Depot's income statement for fiscal 2024 shows a line called depreciation and amortization of $3.0 billion. A banker who adds that figure to operating income to build EBITDA (earnings before interest, taxes, depreciation and amortization) will be wrong by about $700 million, because the company's total depreciation and amortization that year was about $3.7 billion. Nothing improper is going on: the difference sits inside cost of sales, where depreciation of distribution assets is charged, and the full figure is disclosed in the notes. It is simply not on the face of the income statement.

The same pattern runs through many income statements. Because companies present expenses by function, depreciation is allocated to the function that uses the asset: factory equipment to cost of goods sold, stores and offices to selling and administrative costs, data centers to cost of revenue. Some companies show no depreciation line at all; others show one that captures only part of the total. Since EBITDA is the most widely used earnings measure in banking, as the explainer on what EBITDA is and why it matters explains, knowing where depreciation and amortization sit, and where to find the complete number, is a basic skill.

Most US public companies classify operating costs by what they are for, not by what they are, the functional layout described in how the income statement works. Depreciation follows the asset it relates to. A manufacturer's machines are part of the cost of making inventory, so their depreciation is added to inventory and reaches the income statement through cost of goods sold when the products are sold. Depreciation of a head office or a sales fleet goes to selling, general and administrative expenses. Amortization of acquired intangible assets, such as customer relationships from an acquisition, is often shown separately, but can also sit within cost of sales or operating expenses.

The allocation is largest where assets are central to delivering the product. For a manufacturer, most depreciation sits in cost of goods sold, which is why its gross margin already reflects the cost of its plants, as covered in COGS and gross profit. For cloud and internet companies, depreciation of servers and data centers is usually inside cost of revenue and can be one of the largest items there. For retailers, depreciation of distribution centers often sits in cost of sales while store depreciation sits in operating expenses, which is the split behind the Home Depot figures below.

Depreciation and amortization (D&A)

The allocation of the cost of long-lived assets over their useful lives: depreciation for tangible assets such as buildings and equipment, amortization for intangible assets such as software, patents and acquired customer relationships. Both are non-cash expenses added back when calculating EBITDA and operating cash flow.

Wherever it is presented, the charge has the same effect on the other statements: it reduces pre-tax income and taxes, is added back in operating cash flow, and reduces the carrying amount of the asset, as traced in depreciation on the three statements. Only its location on the income statement changes, and with it the subtotals it affects.

Securities and Exchange Commission (SEC) staff guidance limits how companies can present this. Deloitte's guide to non-GAAP measures that exclude depreciation from cost of sales explains the effect of SEC Staff Accounting Bulletin Topic 11.B: a company whose cost of sales excludes depreciation must say so in the caption, and it should not present a subtotal, such as gross profit, that excludes depreciation, because that would show a figure for income before depreciation. The result is that companies either include depreciation inside their functional lines, or show it separately with a caption such as "cost of sales, exclusive of depreciation shown separately below."

Home Depot's fiscal 2024 Form 10-K shows the gap clearly. Its income statement includes a depreciation and amortization line of $3,034 million within operating expenses. Its segment note reports total depreciation and amortization of $3,708 million, with a footnote that the figure includes depreciation and finance lease amortization in cost of sales, as well as intangible asset amortization. Its cash flow statement adds back $3,336 million of depreciation and amortization excluding intangibles, plus $425 million of intangible asset amortization:

Three figures, three slightly different answers, each correct for what it measures. The income statement line captures only the depreciation and intangible amortization charged to operating expenses. The segment note and the property note, combined with intangible amortization, give the full expense of $3,708 million. The cash flow figure of $3,761 million is $53 million higher still, a difference the filing does not itemize, which shows that a cash flow add-back can be broader than the expense disclosed in the notes.

The consequence for EBITDA is direct. Home Depot's operating income was $21,526 million. Adding only the income statement line gives EBITDA of $24,560 million; adding the full total gives $25,234 million. The $674 million gap is about 2.7% of EBITDA, which at any multiple translates into the same percentage of value.

Because the income statement often understates D&A, bankers take it from other parts of the filing. Each source has a slightly different scope:

The safest approach is to take the cash flow figure, reconcile it to the segment note or the asset notes, and understand any difference before using it. The mechanics of the add-back itself are covered in non-cash items on the cash flow statement.

The standard construction is operating income, as reported or as adjusted for unusual items, plus total depreciation and amortization from a reliable source. Two errors are common. The first is the Home Depot error, adding back only the income statement line and understating EBITDA. The second is double counting: adding back impairment charges as if they were depreciation when they are already being removed as one-time items, or adding back amortization of items that are not long-lived assets. The definitions of EBIT and EBITDA, and the adjustments bankers make to each, are set out in operating income, EBIT and EBITDA.

Disclosure is improving. A new Financial Accounting Standards Board (FASB) standard on expense disaggregation will require public companies, for fiscal years beginning after December 15, 2026, to disclose in the notes the depreciation and amortization included in each relevant expense caption, along with purchases of inventory and employee compensation. Once it applies, the derived figure in the Home Depot example will be disclosed directly, as explained in US expense disaggregation disclosures. Until then, the habit that matters is simple: never take a depreciation line on the face of the income statement as the full figure without checking the notes and the cash flow statement.