Why do non-cash items balance?
Hey everyone!
Very long time reader but first time poster.
Looking for some clarification regarding the concept of non-cash items (gains/losses on disposals etc.) and their overall impacts on CFS/BS.
I'm aware that the cash flow statement is essentially a breakdown of all P&L/BS movements in terms of cash and can build out a CFS given P&L and BS without too much trouble, but just a bit curious about this one point.
If all BS A/L movements are accounted for in the indirect CFS and net income (incl. non-cash items) is included in the BS through RE in equity - how are the non-cash addbacks balanced? Assuming that the cash portion of net income is balanced with assets through cash, but do we have to assume that the non-cash portion of net income (and therefore equity) is balanced by other asset/liability line items? I can't see how there wouldn't be a double count if the changes of each BS line are also accounted as well as the individual line items in the CFS.
Sorry if this is a bit confusing - probably overthinking things a bit here.
SBs (if I can) to anyone that could give me a hand.
Cheers
It’s not double counted because the “equity part” of the transaction is not included in sales revenue to start with as that part was capitalized.
Heres a very basic example:
Cash. 105k
Gain on Sale 5k
Equipment 100k
As you see only the gain hits the income statement,
When you move to cash flow statement that gain is clearly not coming from an operating activity so it will be subtracted from net income in that section of the statement.
However, in the investing activities section the cash received from the sale of equipment (105k) would be fully recorded.
Hopefully I understood your question. Please let me know if you have further questions.
Fantastic - exactly what I was looking for.
Thanks a bunch
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