Since they never pay out any cash for this form of compensation, it's added back to cash flow. David Tice, whose Prudent Bear Fund often ''shorts'' stocks or seeks to profit from their declines, argues this tax benefit doesn't belong in the operating section because it's not generated by operations. Lucent is not alone. Once such adjustments are complete, read the cash-flow statement to see how the company makes and spends its cash. This is followed by items that increase or reduce net income but have no impact on cash.
Depreciation is the most common example.
An expense that lowers net income, depreciation is an accounting technique that allows companies to spread the cost of big-ticket items over many years. The expense is recorded long after cash has been spent, so the expense must be added back to the cash flow. At the heart of cash from operations are changes in assets and liabilities. Accounting experts pay a lot of attention to accounts receivable, representing what customers owe the company. When receivables rise at a faster pace than sales, the company may be having trouble collecting what it is owed.