![]() It serves as a gateway to other reported financial statements.It is considered to be among the purest measures of cash sources and offers a transparent insight into a company’s operational performance.A relatively high net income may indicate that the firm finds it challenging to collect accounts receivable.A negative OCF indicates that a company does not have sufficient funds to run its core operations and needs to borrow funds to maintain the same.Importance of operating cash flow is as follows – =Rs.55000 Significance of Operating Cash Flow OCF = Net Income (+/-) Changes in Assets and Liabilities + Non Cash Expenses Solution: By using the indirect method of operating cash flow, Change in accounts receivable: Rs.50000.Joe Limited’s financial statements for the financial year 2017 comprise the following information. OCF = Net income + Non-cash expenses – Increase in working capital OCF = Net Income + Depreciation + Deferred Tax + Stock-oriented Compensation + non-cash items – Increase in Accounts Receivable – Increase in Inventory + Increase in Accounts Payable + Increase in Deferred Revenue + Increase in Accrued Expenses Like discussed, the operating cash flow formula can be given by – ![]() Operating cash flow = Net income (+/-) Changes in assets and liabilities + Non-cash expenditure Operating Cash Flow Formula and Example ![]() In other words, the indirect method of calculating OCF requires the addition of non-cash items to the net income and also tunes out the changes in the net capital. On the other hand, depreciation is also added to the net income to adjust the changes in cash receivable and inventory. In this method, the net income is adjusted by adding the non-cash items to account for the changes in the balance sheet. Operating cash flow = Total Revenue – Operating Expense Resultantly, it is used mostly by the companies to track their operational performance. However, this operating cash formula does not provide much insight to potential investors. It is regarded to be a simple formula that helps to obtain accurate results. Usually, there are 2 methods of computing operating cash flow or OCF, namely – Furthermore, it also highlights a clear demarcation between the cash generated through investing activities and financing activities. Notably, operating cash flow is recorded on a cash flow statement right in the first section.
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