In order to adjust net income to cash, we add back non-cash items related to operating activity as they are not actual outflow of cash. Non-cash items include the following: Depreciation and Amortization: These are non-cash expenses that reduce net income but don't impact cash flow. Therefore, they are added back into the cash flow. Stock-based Compensation: This is another non-cash expense that needs to be added back to net income. Deferred Taxes: Depending on whether it's a deferred tax asset (future tax break) or deferred tax liability (future tax to be paid), the change in deferred taxes is either subtracted from or added to net income. Gains, Losses, Impairments, and Write-Downs and other non-cash items: These are expenses recognized in the net income but are not cash during the period.
Learn Non-cash Adjustments with interactive examples and practice exercises in our Cash Flow Statement module.
This interactive learning module helps you understand Non-cash Adjustments through hands-on practice and real-world examples.