Non-Cash Item
What it is:
A non-cash item is an entry on an income statement or cash flow statement correlating to expenses that are essentially just accounting entries rather than actual movements of cash.
How it works (Example):
Depreciation and amortization are the two most common examples of noncash items. They are a standard feature of income statements, whose purpose is to account for all of a company’s expenses in a given period. Though the company’s assets do lose value over time (hence the need to record depreciation), the company does not actually write a check to “Depreciation.” It is just an accounting entry to reflect the reduction in the value of the company’s assets.
Why it Matters:
It’s crucial to remember to separate non-cash items from cash items in financial analysis. The presence of non-cash items are precisely why cash flow is not the same as net income, which includes transactions that did not involve actual transfers of money. Knowing when to add back the deductions for non-cash items helps the analyst understand how much cash a company actually generated (or didn’t generate). The statement of cash flows helps with this.
