Changes in net working capital do not affect the income statement.
Changes in net working capital do affect the cash flow statement, since we typically start with net income in the beginning of the cash fl ow statement. Then we have to add back non-cash changes, which include changes in net working capital.
This is because changes in net working capital represent either more cash being put into the daily operations of the business (e.g. through accounts receivable, inventory, or prepaid expenses), or less cash being put into the daily operations of the business (e.g. through more favorable terms on account payable). Therefore, changes in net working capital directly impact the cash flow statement. It’s usually a negative cash outflow since as businesses grow, they have more accounts receivable and inventory.
Changes in net working capital also affect the balance sheet, since it involves the year-over-year changes on the current assets (accounts receivable, inventory, or prepaid expenses) and liabilities (accounts payable, other current liabilities) on the balance sheet.