Question 1

What are operating activities in a cash flow statement?

Accepted Answer

Operating activities represent a company's core revenue-generating functions, such as selling goods or providing services. These activities show whether a company can generate sufficient cash flow to sustain operations without depending on external financing. Understanding operating activities helps stakeholders assess financial health and liquidity.

Question 2

Why is depreciation added back when calculating operating cash flow?

Accepted Answer

Depreciation is a non-cash expense that reduces reported profit without affecting actual cash outflow. When calculating operating cash flow using the indirect method, depreciation must be added back to net income because it doesn't represent real cash spent. This adjustment ensures the cash flow statement reflects actual cash movements.

Question 3

How do changes in accounts payable affect operating cash flow?

Accepted Answer

When accounts payable increases, it means the company has delayed paying suppliers, effectively conserving cash. This increase is added back to net income because it reflects postponed cash payments. An increase in accounts payable improves operating cash flow by showing the company has more available cash on hand.

Question 4

What does an increase in accounts receivable mean for cash flow?

Accepted Answer

An increase in accounts receivable indicates that more sales were made on credit, meaning customers owe the company money but haven't paid yet. This amount is deducted from net income when calculating operating cash flow because it represents cash that has not yet been received, reducing available liquidity.

Question 5

How do you calculate operating cash flow from net income?

Accepted Answer

Operating cash flow equals net income plus non-cash expenses like depreciation, adjusted for changes in working capital. Add increases in liabilities like accounts payable and subtract increases in assets like accounts receivable. This formula reveals how effectively a business converts accounting profits into actual cash available for operations.

Question 6

Why is operating cash flow more important than net income for assessing financial health?

Accepted Answer

Operating cash flow shows actual cash generated from core operations, while net income includes non-cash items and accounting adjustments. A company might report growing profits but struggle with cash if customers delay payments or inventory builds up. Strong operating cash flow demonstrates the business can fund operations internally and reduce reliance on external financing.

Question 7

What does Delta Furniture's operating cash flow calculation reveal about the company?

Accepted Answer

Delta Furniture reported net income of eighty thousand dollars, adjusted for seventy thousand in depreciation and a forty thousand increase in accounts payable, minus a twenty-five thousand increase in accounts receivable. The resulting operating cash flow of one hundred sixty-five thousand dollars indicates the company generates sufficient cash from operations to sustain its business activities.

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