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The adjustment of net income for non-cash expenses like depreciation and changes in working capital can reveal the cash flow from operating activities by providing a more accurate picture of the cash generated or consumed by the company's core business operations. Depreciation is a non-cash expense that reduces net income but does not impact cash flow. Therefore, adding it back to net income can give a clearer view of the cash flow. Similarly, changes in working capital accounts (accounts receivable, inventory, and accounts payable) also affect net income but not cash flow. Adjusting for these changes can help reveal the actual cash flow from operating activities.
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How to clearly show the performance of your organization with numbers? The three financial statements model – which includes the balance sheet, the in...
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This statement begins by adjusting the net income from the Income Statement for non-cash expenses like depreciation and changes in working capital, such as accounts receivable, inventory, and accounts payable. This adjustment reveals the cash flow from operating activities, which is the amount of cash generated or consumed by the company's core business operations.
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