Question

Depreciation is classified as a noncash item because no cash is spent when depreciation is recorded. Why are expenses that have been accrued, but not yet paid, not also considered to be noncash items and therefore excluded from operating cash flow just as depreciation is excluded?

Answer 1

The accrued expenses are the expenses for which no cash has been exchanged yet. Since, no cash has been exchanged no cash flow is created. Hence, these expenses are not recorded at all, while computing the operating cash flows.

Depreciation expense does not affect cash flows at all so it is added back while calculating the operating cash flow. As it is deducted while calculating the net income. So, net income is reduced but no cash spent on it. Depreciation is a non- cash expense and no cash s spent on it.