Accounting charges or expenses that reduce taxable income but don’t require cash outflow. These items are expenses against revenues but don’t affect cash flow. Examples include depreciation, amortization, depletion, deferred taxes, etc. Depreciation reflects an accounting estimate of the cost of assets used up in business activities. Suppose an asset with a productive life of 5 years and no terminal value is bought for $10,000. Accounting-wise, this amount must be depreciated (say $2,000 each year) over the life of the asset. From a finance point of view, the cost of the asset represents the actual outflow incurred at the time of purchase.
Non-cash items are usually added back to net income in order to determine cash from operations.
Comments