WHAT IMPACT DO NON CASH ITEMS HAVE ON THE FINANCIAL STATEMENTTHAT - ProProfs Discuss
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What impact do non-cash items have on the financial statementthat differ from their impact on ratio calculations?



Asked by Kendrell, Last updated: Oct 20, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

Think about the effect that amortization/depreciation had on the companys earningsstatement - these non-cash items reduced net income. so if you are starting from netincome and working backward, you need to add back those items in order to get a truepicture of actual income received by the company.example:your company earns $100 in cash in the past year and had $10 depreciationexpenses. this leads to a net income of $90if i asked you how much your company actually made in terms of cash flow, hopefullyyou dont give me an answer of $90. to figure out the answer, start with net incomeand work backwards, eliminating the effects of all non-cash items:$90 net income + $10 depreciation = $100the opposite scenario holds for equity income. equity income is a non-cash item thatincreased net income. to remove its effect in order to gain an accurate picture of whatthe company made, you need to subtract the item from the net income figure.example:your company earns $100 and also claims $20 in equity income for a net income of$120. if i asked you how much your company actually made in the past year, youshouldnt answer $120, since some of that income was the result of a non-cash item.to answer the question of how much the company actually brought in:$120 net income - $20 equity income = $100
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