(Increase)/Decrease in Non-cash Current Assets

This class of reconciling item represents the change in non-cash assets related to operating activities. If the balance of assets increased from the balance reported at the end of the previous fiscal year, the difference is subtracted from operating income to reconcile to net cash flows from operating activities.

The reason behind subtracting a positive change is as follows:

• The revenue related to these assets has already been recognized in the calculation of operating income on the operating statement.
• However, since the asset balance is increasing, no cash flow occurred to liquidate the receivable.
• Therefore, cash flows did not occur and to reconcile net cash flows from operating activities, the amount that assets increased should be subtracted from operating income.

By the same logic, a decrease in assets represents a cash inflow (receipt) greater than the revenue recognized in the calculation of operating income on the operating statement. For example, the agency collected receivables whose related income was recognized in the previous fiscal period. Therefore, the amount should be added to operating income to reconcile to net cash provided from operating activities.

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