Final answer:
Changes in operating assets and liabilities that affect cash but are not in net income include adjustments for accounts receivable, inventory, and accounts payable. Components of net income that do not affect cash are non-cash expenses like depreciation, non-cash gains or losses, and stock-based compensation.
Step-by-step explanation:
Understanding Changes in Operating Assets and Liabilities
The changes in operating assets and liabilities during a period that affect cash but are not included in net income are usually adjustments made in the cash flow statement. These adjustments are necessary because net income is calculated using the accrual basis of accounting, where revenue is recognized when earned, and expenses are recognized when incurred, regardless of when the cash is actually received or paid.
Examples of changes in operating assets and liabilities that affect cash include:
Accounts receivable: An increase in accounts receivable indicates that a company has made sales for which it has not yet received payment, thus not affecting cash.
Inventory: An increase in inventory reflects cash spent on stock that hasn't been sold yet, while a decrease would suggest cash inflow from sales.
Accounts payable: An increase shows that the company has purchased goods or services on credit and has not paid for them yet, which does not immediately affect cash balance.
Components of Net Income That Do Not Affect Cash
When it comes to net income, several components do not have a direct impact on cash, such as:
Depreciation and amortization: These are non-cash expenses that reduce net income but do not result in cash outflow.
Non-cash gains or losses from foreign exchange, revaluation of assets, or changes in fair value of financial instruments.
- Stock-based compensation, where employees receive shares as part of their compensation package.