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Why is stock based compensation expense considered a non-cash expense?

When a company records stock-based compensation expense, there isn’t an actual cash outflow. As you can see in the journal entry below, the company doesn’t actually credit cash to fund the stock option expense. Instead, the company funds the stock option expense by issuing more common stock.

An example of another type of non-cash expense would be depreciation expense.


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    Depreciation and amortization are considered to be a non-cash expense because the company does not have an actual cash outflow for those expense. Depreciation and amortization are recorded to reduce the taxable income for a company. As you can see below, there is no cash outflow when depreciation expense is recorded.

  • How to calculate EBITDA?

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  • What is the journal entry to record stock options being exercised?

    The visual below illustrates the two key activities that must be performed. First, you have to figure out how to record the stock option expense during the vesting period. Next, you need to figure out what entry is needed when the stock options are exercised. For example, on January 1, Year 1, Thayer Robotics granted stock options to the rockstar female CEO to purchase of 25,000 shares of the company’s $20 par value common stock at $42 per share. All stock options were exercised on December 28, Year 1. Using an acceptable option pricing model, Thayer Robotics calculated total compensation cost of $300,000. The quoted market prices of Thayer’s $15 par value common stock were $43 on January 1, Year 1 and $49 on December 28, Year 1. The journal entry to record the options when they are exercised would be: If you are studying for the CPA exam, then sign up for a free trial to have full access to the Universal CPA platform for 7 days here. Universal CPA is the only course that has visual learning and bite-sized video explanations for every single MCQ and simulation. To learn more about the Universal CPA course and see a demo of the course, visit this link.