Interpretation of Statement of Cash Flows
Cash Flows from Operating Activities
Net Income/Loss:
Cash flow from operating activities is positively affected by accrual profit and affected negatively by losses.
“Add-backs” to Net Income:
Depreciation and Amortization:
Expenses from depreciation and amortization are added back to net income when calculating operating cash flow. Such expenses are classified as “non-cash items or expenses” because companies do not “cut checks” for these expenses. Depreciation and amortization expenses represent a reduction of asset valuation due to usage or depletion of that asset. If asset acquisitions increase during the period, depreciation expense will increase and thereby decreasing net income. If assets are completely depreciated, the resulting depreciation expense will decrease and thus increase net income. In all, the result on operating cash flow could be a “wash” since the amounts are added back to period-ended income.
Deferred Compensation:
The deferred compensation account represents accruals and payments for specialized compensation agreements. For example, the future payments and accruals for highly compensated personnel, whose salary and bonus may be based on company performance, are typically captured here. As accruals for future compensation increase cash flow will also increase. Naturally, as payments are made cash flow decreases.
Share-based Compensation Expense:
Like depreciation, share-based compensation is typically a “non-cash item.” These amounts represent changes in company valuation based upon the changes in the price of the shares outstanding. As the value of the shares increases, so does cash flow. If the value declines, cash flow follows suit.
Non-Cash Interest Expense:
This is the final “non-cash item” added to back to net income. In this case, IMC recognizes the interest expense