Lesson Objectives:- How to determine which expenses are non-cash expenses
- Recording non-cash expenses on the cash flow statement
- Finding the total operating cash flow
We've now recorded the accounts receivable, inventory and accounts payable entries which concluded the current assets and liabilities sections. Now lets wrap up the operating activities section of the cash flow statement by reviewing non-cash expenses.
For this section, we will be taking a look at values from the income statement example above.
In order to determine which of the operating expenses on the income statement are non-cash expenses, we need to consider how each expense works. The salaries expense is not listed as a liability on the balance sheet, therefore we can conclude that the salaries were paid for in cash. Another likely scenario is that the salaries expense was included in accounts payable, in either case it will NOT be recorded as a non-cash expense.
Depreciation is considered a non-cash expense because it involves the systematic decrease in value of an asset. This is not considered cash that is used or generated, therefore we will need to add it back in onto the operating activities section of the cash flow statement.
The third expense on the income statement is the income tax expense which is also not listed as a liability on the balance sheet. Therefore we can assume that the company paid for the income tax in cash. Again, if for some reason this expense went into accounts payable, then it would already be accounted for.
Now let's look at how we would prepare the next entry on the cash flow statement.
We found by reviewing each expense listed on the income statement, that only the depreciation will need to be added onto the cash flow statement. Both the salaries expense and income tax expense were either already paid for in cash or included in the accounts payable figure.
For this example, we would simply need to add back in the $40,000 amount for depreciation to finish up the operating section of the cash flow statement.
The operating activities section includes the adjustments for accounts receivable, inventory, accounts payable and depreciation. In order to find the total for cash from operating accounts, we would simply take the net income figure and adjust it based on the 4 entries to come up with a final figure of $210,000.
In the next and final lesson, we will review how to record the investing and financing activities on the cash flow statement.