Increase in NWC Asset and/or Decrease in NWC Liability ➝ Decrease in Cash Flow.However, for changes in net working capital, the following rules apply: The impact of non-cash add-backs is relatively straightforward, as these have a net positive impact on cash flows (e.g. In effect, the real movement of cash during the period in question is captured on the statement of cash flows – which brings attention to operational weaknesses and investments/financing activities that do not appear on the accrual-based income statement. Accounts Receivable, Inventory, Accounts Payable, Accrued Expenses) Therefore, the statement of cash flows is necessary to reconcile net income to adjust for factors such as: the accrual-based “bottom line” – might not be an accurate depiction of what is actually occurring to the company’s cash. The net income as shown on the income statement – i.e. Non-Cash Items → Depreciation is a common example of a non-cash expense recorded on the income statement, yet the real cash outflow occurred in the initial year of the capital expenditure ( Capex). ![]()
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