Since accounting is based on the accrual concept, accounting earnings often differ significantly from the cash that actually flows into and out of the business.
ACTUAL Cashflows (Not Cashflow From Operations)
| Adjustment | Why it is needed |
|---|---|
| (+) Non-cash expenses (Depreciation, Amortization) | These reduce accounting profit but no cash leaves the company when they are recorded. |
| (-) Capex | Capex requires real cash outflow today but is not fully expensed on the income statement. Accounting spreads it over future years through depreciation. |
| (+/-) Working Capital changes | Revenue may be recorded before cash is collected (receivables). Expenses may be recorded before cash is paid (payables). These timing differences distort earnings. |
“Cash is a fact, earnings are an opinion.“