What is a Non-Cash Charge?
Anon-cash chargeis a write-down or accounting expensethat does not involvea cash payment. They can represent meaningful changes to a company's financial standing, weighing on earnings without affecting short-term capital in any way. Depreciation, amortization, depletion, stock-based compensation, and assetimpairmentsare common non-cash charges that reduce earnings but not cash flows.
Key Takeaways
- Anon-cash chargeis a write-down or accounting expensethat does not involvea cash payment.
- Depreciation, amortization, depletion, stock-based compensation, and assetimpairmentsare common non-cash charges that reduce earnings but not cash flows.
- Non-cash charges are necessary for firms that use accrual basis accounting.
Understanding a Non-Cash Charge
Non-cash charges can be found in a company’s income statement. Charges unaccompanied by a cash outflow must be recorded and are necessary for firms that use accrual basis accounting, a system used by companies to record their financial transactions, irrespective of whether a cash transfer has been made.
Accrual Accounting
Depreciation,amortization, anddepletionare expensed throughout the useful life of an asset that was paid for in cash at an earlier date. If a company's profitdid not fully reflect the cash outlay for the asset at that time, it must be reflected over a set number of subsequent periods. These charges are made against accounts on thebalance sheet, reducing the value of items in that statement.
- Depreciation:When a company buys new equipment, a percentage of the purchase price is deducted over the course of the asset's useful life to factor in things like wear and tear. That expense is recorded every year in the income statement as a non-cash charge.
- Amortization: Amortization is very similar to depreciation, but applies to intangible assets such as patents, trademarks and licenses rather than physical property and equipment. If a company spends $100,000 on a patent that lasts for a decade, it records an amortization expense of $10,000 each year.
- Depletion: Depletion is a technique used to allocate the cost of extracting natural resources such as timber, minerals, and oil from the earth. Unlikedepreciationand amortization, which mainly describe the deduction of expenses due to the aging of equipment and property, depletion is the actual physical depletion of natural resources by companies.
Non-Recurring Charges
Non-cash charges can also reflect one-time accounting losses that are driven by changing balance sheet items. Such charges are often the result of changes to accounting policy, corporate restructuring, the changingmarket valueof assets or updated assumptions on realizable future cash flows.
General Electric Co.’s (GE) $22 billion write-down of the value of its struggling power business in October 2018, referred to as a goodwill impairment charge, is a great example of a non-recurring non-cash charge. Goodwill is added to the balance sheet when anacquisitionexceeds the fair value of the acquired entity, and it must be impaired in the future if the value of the acquired assets falls below original expectations. GE’s big accounting charge, mainly linked to its $10.6 billion acquisition of France-based Alstom, understandably raised eyebrows.
Special Considerations
Non-cash charges, like other types of write-downs, reduce reported earnings and, as a result, can weigh on share prices. Companies often seek to play down the significance of non-cash charges, particularly one-off ones, adjusting earnings to exclude their impact from financial figures.
Investors are tasked with determining whether non-cash charges are a cause for alarm. Non-cash expenses are often pre-flagged and harmless. However, some may appear out the blue and serve as potential red flags of poor accounting, mismanagement and a drastic shift in fortunes.
FAQs
Key Takeaways
What is an example of a non-cash transaction? ›
Acquiring property, plant or equipment by assuming directly related liabilities, such as a mortgage or loan. The net unrealized increase or decrease in fair market value of investments. Obtaining an asset by entering into a capital lease. Acquiring property by exchanging another piece of property.
What are three non-cash expenses examples? ›
Here are some common noncash expenses you may record on an income statement:
- Depreciation. ...
- Amortization. ...
- Unrealized gains and losses. ...
- Provisions or contingencies for future losses. ...
- Asset write-downs. ...
- Goodwill impairments. ...
- Stock-based compensation.
Non-cash working capital (NCWC) includes current assets, such as inventories and accounts receivables, that are used by businesses to finance their daily operations.
How are non-cash transactions recorded in accounting? ›
Non-cash transactions are always recorded in the income statement, as they directly impact total net income, but do not impact cash flow. Next, you'll need to create a contra account for your equipment to keep track of your monthly depreciation expense.
What are two examples of significant non-cash transactions? ›
1 Answer. (i) Acquisition of fixed asset by issue of debentures or shares. (ii) Conversion of debentures into shares.
What is a non-cash expense? ›
Noncash expenses are business expenses that do not require the expenditure of cash. There are four types of noncash expenses: depreciation, depletion, amortization, and deferred charges. Noncash expenses are recorded as expenses on the income statement, but they do not have an effect on cash flow.
What are some examples of non-cash charges on an income statement? ›
Depreciation, amortization, depletion, stock-based compensation, and asset impairments are common non-cash charges that reduce earnings but not cash flows.
Which of the following is always a non-cash expense? ›
In this question, option C depreciation is correct. Depreciation is the fall in the value of asset due to wear and tear. It is not shown in cash terms.
What is an example of a cash expense? ›
Examples: → Cash Expenses: Buying raw materials, paying wages, utility bills. → Non-Cash Expenses: Depreciation, amortization, stock-based compensation. Accounting Treatment: → Cash Expenses: Recorded as an expense on the Income Statement & Cash Flow Statement when incurred, impacting cash and expense accounts.
Some examples of noncash investing and financing activities include: Converting debt to equity. Acquiring long-lived assets through the assumption of directly related liabilities (e.g., purchasing a building by incurring a mortgage to the seller).
Can non cash be used as paid up capital? ›
It is a yes because, having said what was mentioned earlier, shares can be bought by the shareholders for consideration other than cash.
Is working capital cash or non cash? ›
What Is Working Capital? Working capital, also known as net working capital (NWC), is the difference between a company's current assets—such as cash, accounts receivable/customers' unpaid bills, and inventories of raw materials and finished goods—and its current liabilities, such as accounts payable and debts.
What non-cash items are not recorded in account? ›
Non-cash items are those that do not involve the use of cash. Items such as depreciation, outstanding expenses , accrued income etc. are not shown in receipt and payment account because it is a real account. only cash transactions are recorded in Receipt and payment account.
Why is it important to record non-cash transactions? ›
Accounting for Non-Cash Charges
Non-cash charges are important because they lower the overall earnings of a corporation. Since non-cash charges are still included as expenses, they will be accounted for as deductions in the corporation's net income but do not affect the overall cash flow.
How should non-cash transactions be disclosed? ›
ASC 230 requires separate disclosure of all investing or financing activities that do not result in cash flows. This disclosure may be in a narrative or tabular format. The noncash activities may be included on the same page as the statement of cash flows, in a separate footnote, or in other footnotes, as appropriate.
What is a non-cash transaction in banking? ›
Non-cash transactions are financial activities that do not involve physical currency. Instead, they are conducted through electronic means such as bank transfers, credit or debit card payments, electronic funds transfers, and digital wallets.
What are the non-cash transactions in the world? ›
Paris, September 14, 2023 – The Capgemini Research Institute's 2023 World Payments Report, published today, reveals non-cash transaction volumes will reach 1.3 trillion by 2023 globally.
What is a non-cash ATM transaction? ›
However, non-cash withdrawal transactions (such as balance enquiry, cheque book request, payment of taxes, funds transfer, etc.), on own bank ATMs are not to be part of the number of free ATM transactions.
