Can someone explain why the formula for accruals is NOA(end) - NOA(beginning)?? If a company is fully financed using equity and has no liabilities, the formula would give us the following:
change in accounts receivable + change in inventory + change in fixed assets… clearly, inventory and fixed assets are not always accrued…
Cash paid for other operating expenses = Other operating expenses + change Prepaid expenses - change Other accured liabilities
etc…
So basically if you put all these changes in operating assets and liablities on the one side, on the other you will have:
NI - actual cash received / paid for operating and investing activities.
So this change in NOA is the part of net income which is not supported by cash. As we know this part is mean-reverting i.e. if your profit is not supported by cash most likely it will decline in future.