Cash-to-GAAP Reconciliation

Our next step is to reconcile our “cash” net income and EPS figures to the “GAAP” figures reported by BuyerCo in its public company filings. We do this by subtracting the tax-effected amortization and stock-based compensation expenses, as well as one-time items, from cash net income. Recall that we omitted these charges from our calculation of cash net income in the last step.

We’ll also add a line for capital expenditures (“capex”). Although not part of the income statement, capex is included here because when we project the income statement into the future, we should observe that capex and depreciation expense tend to converge over time. Also, capex is often projected as a percent of sales, so it makes sense to include capex in the P&L.