Sanity check: difference between change in NWC and non cash items?
I always understood that the operating CF includes NI, non cash items like D&A, and change in NWC. I’m looking at some of the items for the change in NWC, I feel like many of them are actually non cash items (AR and AP going up for example). It’s a bit confusing for me because I learned that the change in NWC is either a source or use of cash. Where it’s easy to understand that if inventory goes up then you are spending cash and if it goes down then you’re generating cash (income) but it’s not really the case for AR and AP for example. Would appreciate any clarification
Need to think about AR and AP in relation to net income.
Let's talk about AR. Net income goes up when a sale is made. If the cash hasn't been received yet, net income is increased by the sale and so is the AR balance.
You account for not having the cash by looking at the positive change in AR balance and describing it as a "use" of cash on the CFS.
I do think I understand the flow but I guess I’m more stuck on the “use or source of cash”. In my eyes, an increase in AR would not be a use but rather a non cash item.
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