Hey WSO, I've been having trouble learning why would you add or subtract from the cashflow statement. I understand stuff like, add back depreciation/amortization but stuff like deferred income taxes. How should I know when it adds or subtracts something from net income and thus affects cf from operations?
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if it affects taxes it affects net income
That's not what I mean. Sometimes you subtract or add from net income on the CF statement, how do you know if something is a subtraction vs addition? Also not everything that affects tax/net income gets readded/subtracted later on on the CF statement.
If it's a non-cash item then it gets resolved by being added back or subtracted in the walk-down from NI to CFO. Generally speaking, something that increased your NI from a non-cash perspective will get subtracted between NI and CFO, whereas something that decreased your NI from a non-cash perspective, then it will get added between NI and CFO. It's ultimately the same principle as why you add back D&A.
You see deferred income taxes show up a lot between NI and CFO because the tax number in the IS is usually just an accrual number and often times is not representative of what a company is actually paying in cash tax estimates each month.
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