Noncash expenses are costs reported on the income statement that do not involve an actual cash outflow during the period. Examples include depreciation, amortization, and stock-based compensation.
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Noncash expenses reduce net income on the income statement but do not affect cash flows directly.
Depreciation is a common noncash expense that allocates the cost of tangible assets over their useful lives.
Amortization is similar to depreciation but applies to intangible assets like patents and goodwill.
Noncash expenses must be added back to net income when calculating operating cash flow in the statement of cash flows.
Stock-based compensation is considered a noncash expense as it involves issuing equity rather than paying cash.
Review Questions
Why are noncash expenses added back to net income in the statement of cash flows?
What is the difference between depreciation and amortization?
How does stock-based compensation impact financial statements?
Related terms
Depreciation: A method of allocating the cost of a tangible asset over its useful life.
Amortization: The process of gradually writing off the initial cost of an intangible asset over its useful life.
Operating Cash Flow: Cash generated from normal business operations, calculated by adjusting net income for changes in working capital and noncash items.