Non Cash Expense | Definition | Examples - YouTube

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clicking the bell ican friends way we have a topic which is non cash expenditures

well what exactly are the non-cash expenditures see non cast expenditures

are the expenses you know that are not related to cash so even they are

reported in the income statement what exactly is there they have nothing

to do with the payment of the cash so the most common non-cash expenditure it

is depreciation if you have gone through the financial statement of the company

you would see that you know the depreciation is reported but actually

there is there is no payment of cash

so you know for example we can say that you know there's a tiny house Builders

Inc you know they buy equipment and they see that you know they do not they they

need to charge a 10,000 for depreciation in there if they need to report the

depreciation for the next 10 years they were reported a position for the

equipment for the next 10 years but actually they will be no or there would

be no cash payment during those 10 years so let's get started

what do non I mean why do non-cash expenditure need not to be recorded see

as for the cruel accounting the item needs to be recorded whenever the

transaction happens so for example when the sales are been initiated the seals

should be recorded in the income statement irrespective of the money that

has received owner on the other hand if you see for the cash accounting it is

recorded only when the cash is being received so the sale would be recorded

and for the same reason we need to record the non-cash expense even when

the company does not pay out anything in cash let's understand the list what is

the list of non-cash expense let's look at the most used non-cash expense

example the first one is the depreciation as mentioned earlier you

know depreciation is a non-cash expenditure and if the company buy is a

machinery or asset it needs to set aside a certain amount for the wear and tear

and that expense is recorded every year in the income statement the company so

this expense is called the depreciation and it is the non-cash expense

now the second one that is the amortization part

amortization expenses just like you know depreciation but but for the

intangible assets let's say that the company has built a patent for expending

around let's say for $1,00,000 now if it lasts for 10 years

let's hit last for 10 years then become new who has to record the amortization

expense of 10000 each year as an amortization expense and how

10000 comes from 100000 you divided by 10

the 3rd one what that is

unrealized gains and unrealized losses so there are two sides of the same coin

you know when an investor invests in investment and feels that you know the

investment would earn them more profit in the future we will call it as

unrealized gains actually there is no cash from it's just on the paper until

you know the position is closed if you see on the other hand the unrealized

losses is also the same but in this case the investor feels you know that the

investment will yield more future losses but only on the paper

now since this are not cash profits or losses we will only consider them as

non-cash items that is the unrealized loss can be termed as non-cash expense

forth this stock based compensation

well many companies they pay their employees stock option this stock

options are included in the compensation package so these are not direct cash but

they are like you know they are the company shares or when a company don't

have enough cash to pay off its employee they go for what we call as the stock Based

is the compensation and even the employees leave the

organization they cannot get the full value of the stock based fifth one

that we have is the provision for future losses now companies often create

provisions for expected losses now for example if our company sells a portion

of their total sales on credit there's always a chance that they know they

wouldn't they wouldn't receive the whole of the amount in cash and a few

customers may not the they may not be at all and the

company would not need to call them as bad debt know before the effect bad debt

edit it hits the company and company wants to protect its own interest and

that's why they create a provision for bad debt and this is one of the

non-cash expenditure because nothing goes out in beach now why are non-cash

expenditure adjusted for valuing the company

well when the when the financial analyst looks at the free cash flow of the firm

or the free cash flow of the company while conducting the discount at a DCF

method non-cash expenditure have no placement now this non-cash expenditure

reduces the actual cash if they are not adjusted and that's why this expense are

added back while calculating the free cash flow of the firm now since free

cash flow the firm stakes states that you know the financial viability of the

business we cannot include non-cash expenditure over so out of all the

discussions that we have done the non-cash expense

they are useful when we record them in the income state and recording the non

Kasich's furniture it basically allows us to find d what we call as the net

income so if you see the net income of the company isn't always useful for the

investor not always and they want to know what the company's actual worth is

so that's why we need to value a business to value a business we need to

examine the cash flow of the business and while calculating the free cash flow

we will do something that is called will add back

the non-cash expense and so that we know we can get to the

actual cash inflow and on so let's quickly recapitulate depreciation

amortization unrealized gains and unrealized losses stocks based

compensation and provision for future losses so this was the examples that we

took and final conclusion that we have made but thank you everyone for joining

the session so that's it for this particular topic if you have learned and

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