![]() ![]() Operating cash flow includes all cash (revenue) a company’s main business activities generate. There are three types of cash flows in a business: Operating Operating Cash Flow = Net Income + Depreciation + Stock Based Compensation + Deferred Tax + Other Non Cash Items – Increase in Accounts Receivable – Increase in Inventory + Increase in Accounts Payable + Increase in Accrued Expenses + Increase in Deferred Revenue The Three Types of Cash Flows Operating Cash Flow – Net Income + Non Cash Expenses – Increase in Working Capital Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital or Since the majority of companies report net income on an accrual basis, several non-cash items are included like amortization and depreciation. With the indirect method, net income is adjusted to a cash basis, based on changes in non-cash accounts like accounts payable, accounts receivable, and depreciation. Positive cash flow is a good thing, as it means the core business activities are producing enough revenue to keep the company moving foward. Salaries and wages paid out to employees.With the Direct Method, a company records all transactions on a cash basis and then displays the information with actual cash inflows and outflows that occur during the accounting period.Įxamples of the direct method of operating cash flow include things such as: The Direct Method of Cash Flow Calculation When accounts payable, accrued expenses, and unearned revenues increase, there is a subsequent increase in cash.Increases in accounts receivable – this reduces cash too because a position of revenue hasn’t yet been paid by your customers. ![]() (Not always true, as you may have to write off some inventory as lost, stolen, or damaged. If it goes down, there’s usually an increase in cash. Inventory on the balance sheet goes up – there’s a reduction of cash.Then, you factor in the change in working capital – operating assets and liabilities. Other expenses/income – includes a variety of items like accrued items, or unrealized losses or gains.Stock-based compensation not paid out with cash, but compensation that is paid out through the issuance of additional shares.Depreciation – the accounting method for expensing property, plant, and equipment (PP&E) purchase.It would appear on the operating cash flow section of the cash flow statement like this:Īll non-cash items are added back, reversing any accruals such as: The difference results from the depreciation expense of $150 million, an increase in accounts receivable of $50 million, a decrease in accounts payable of $50 million. Using the accrual method of accounting, revenue is organized when it is earned not necessarily when the money is actually received.įor instance, consider a manufacturing company that reports a net income of $100 million while its operating cash flow is $150 million. Using the indirect method a company begins with their net income on an accrual accounting basis and works backward to achieve a cash basis figure for the accounting period. The Indirect Method of Cash Flow Calculation It does not include any long-term capital expenditures or investment revenue and expenses. ![]() If a company chooses to use the direct method, the company must still perform a separate reconciliation similar to the way they would with the indirect method.Ĭash flow from operating activities (CFO) indicates how much money a company brings from ongoing, regular, activities. ![]() These are known as the indirect method and the direct method. You may also hear OCF referred to as “cash flow from operating activities.” It is presented on the cash flow statement.Īccording to the generally accepted accounting principles or GAAP, there are two methods of presenting operating cash flow section. OCF represents the cash impact of a company’s net income (NI) from its main activities. Otherwise, it may have to turn to outside sources of capital to finance operations and growth. An organization’s operating cash flow serves as an indication of whether a company can generate enough cash to maintain itself and grow. Operating cash flow, known as OCF, is a way to measure the amount of money generated by a company’s normal business operations. ![]()
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