Adjustments to Net Income

 
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Adjustments to net income are non-cash transactions that appear on the balance sheet and income statement that must be factored in when determining a company's cash flow from operations.

When measuring the cash flow in and out of a business, operating cash flow reflects how much cash is generated from a company's products and services. This includes accounts receivable, depreciation & amortization expense, inventory, and accounts payable. However, not all of these transactions involve actual cash items, and these non-cash expenses or revenues must be calculated into a company's net income as well as into its total assets and total liabilities. Depreciation, for exampl

Applications of adjustments to net income

Two scenarios requiring an adjustment to net income:

  • Depreciation - The total value of an asset declines over time; but this is not a cash expense. However an amount must be deducted from the total value of the asset, so this is subtracted from net income when calculating cash flow.
  • Inventory - When a company acquires more raw materials and creates more products, this in turn indicates an outflow of operating cash. The reverse is also true - a decrease in inventory would be added to net sales.

Example Cash Flow Statement

Adjustments to Net Income, GOOG 2008 10-K, p. 67
Adjustments to Net Income, GOOG 2008 10-K, p. 67
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