We may sometimes take for granted when reading financial statements how many steps are actually involved in the calculation. Whether you’re an accountant, a financial analyst, or a private investor, it’s important to know how to calculate how much cash flow was generated in a period. Image: CFI’s Advanced Modeling Course – Amazon Case Study.Īt the bottom of the operating cash flow section, we can see the total, which is labeled as “Net cash provided by (used in) operating activities.” The line is the sum of all items above it and represents the total for the period. When accounts payable, accrued expenses, and unearned revenue increase, they cause an increase in cash.When accounts receivable increases, it also creates a reduction of cash, as it means a portion of the revenues recorded have not yet been paid by customers.When inventory on the balance sheet goes up, it results in a reduction of cash.Change in working capital (operating assets and liabilities) adjustments include:.Deferred taxes arise from the difference between accounting methods companies use when filing their taxes vs those needed for filing their financial statements.Other expense/income could include various items such as unrealized gains or losses or accrued items.Stock-based compensation is not paid out with actual cash, but instead with the issuance of shares.Depreciation, which is an accounting method for expensing property, plant, and equipment (PP&E) purchases.All non-cash items are “added back”, meaning any accruals are reversed, including:.Net income from the bottom of the income statement is used as the starting point.Let’s analyze how the operating section works: In addition to those three sections, the statement also shows the starting cash balance, total change for the period, and ending balance. As you can see, the consolidated statement of cash flows is organized into three distinct sections, with operating activities at the top, then investing activities, and finally, financing activities. When performing financial analysis, operating cash flow should be used in conjunction with net income, free cash flow (FCF), and other metrics to properly assess a company’s performance and financial health.īelow is an example of operating cash flow (OCF) using Amazon’s 2017 annual report. OCF begins with net income (from the bottom of the income statement), adds back any non-cash items, and adjusts for changes in net working capital, to arrive at the total cash generated or consumed in the period. Operating Cash Flow (OCF) is the amount of cash generated by the regular operating activities of a business within a specific time period.
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