Wednesday, April 21, 2010

Non-Cash Expenses

A friend was asking me some questions about financial statements and modeling companies and it brought up an interesting question. What exactly are non-cash expenses? For example, when we calculate FCFF we normally just focus on depreciation, although technically depreciation is just a component of the broader category of non-cash expenses. The next most obvious non-cash related expense is deferred taxes.

This got me thinking about what else is included:
  • employee stock compensation (appearing on the I/S as operating expenses in SG&A)
  • deferred wages (possibly relating to a pension plan obligation or company matching scheme, also appearing in SG&A)
  • restructuring charges
  • impairment of good will
  • amortization of intangible assets
  • non-controlling interest

These are normally the cash flow items that appear right in the "adjustment for non-cash expenses" (or similarly named category in CFO) with depreciation and deferred taxs after NI but before operating working capital.

When we were doing financial modeling in NYC, this was the most common question people where people were confused and were asking each other as it related to what exactly was going on in the statement. Other items, like OWC, CFI or CFF were normally pretty straight forward.

With the CFA level II material, at least it is going over some of the more common items in detail which really helps when reviewing and reading F/S. It provides a bit of clarity as to exactly what is happening in the income statement and the real cash effects it is having on the operation of the company.

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