Noncash expense accounts

Much of the supply chain and operations activities fall into the operating activities, and include cash outflows for payables, inventory and materials, COGS, overhead, and prepaid expenses. Cash inflows include accounts receivable and sales revenue. Noncash expense accounts such as depreciation and amortization are included in... 

An income statement or profit-and-loss account gives the net annual profit A vp before tax. In order to assess the annual cash income Ac, as a source of funds from the value of the net annual profit A vp given in the income statement, it is necessary to add back all noncash expenses such as the balance-sheet annual depreciation charge Abd-This practice sometimes erroneously suggests that depreciation is a source of funds, whereas cash income is the only source of funds. 

Depreciation charges are the most common type of tax allowance used by governments as an incentive for investment. Depreciation is a noncash charge reported as an expense, which reduces income for taxation purposes. There is no cash outlay for depreciation, and no money is transferred to any fund or account, so the depreciation charge is added back to the net income after taxes to give the total cash flow from operations. 

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