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Query related to cash flow
Why the non cash exp. Is to be added back to Net Profit in cash flow & non cash income deducted to net profit i know that
We need to show only Actual Net profit which includes only cash item.
Then why we not deducting the non cash exp. in to Net Profit in CFS
SUPPOSE, we have a Net profit of Rs. 50,000 Further we find out that There is Rs.4,000 of non cash exp which is forgotten to take in P&L
In that case The Net Profit will be (50,000-4,000) = 46,000
My question is why we not do the same in CFS
I mean to say that why not deducted non cash exp to net profit in cash flow statement.......??
Replies (3)
Hello Harish, reply to your question on Non- Cash Expense not to be deducted from P&l in cash flow statement
Cash Flow gives us the true picture of Flow of Cash, Whreas P&L A/c Is the revenue or loss for the current year.
Since Non Cash expenses do not have an effect on the the cash, therefore they need not be subtracted from Net P&L in CFS..
Let us first know what is cash flow statement. Cash Flow Statement (CFS) is a statement which involves inflow or outflow of CASH items only i.e. all cash receipts & all cash payments are summarised in CFS.
Now, have a look at some items namely depreciation, profit/loss on sale of asset etc. These are purely non-cash item. Think for a while - when charging depreciation @ 10% on Rs. 100000/- (i.e. Rs. 10000/-)actually involvs any cash i.e. do you actually pays cash for depreciation. Your answer will definately be 'No.'
And if it actually doesn't involve any cash then how can we deduct depreciation for computing profit?
We can sum this up by saying that
For preparing cash flow statement we convert our p&l a/c from accrual basis to cash basis..
Now depreciation which is a non cash item reduces our profit but does not affect the cash
Similarly non cash incomes like interest accrued but not due on investments are subtracted fro. Cash flow
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