Question

How do you use a companies income and balance sheet to calculate a companies operating cash flow..... step by step?

Answer 1

Operating cash flow can be calculated by the company's balance sheet and income statement in the following manner under indirect method of calculating the operating cash flows:

Steps:

(1) We will start with the net income from income statement.

(2) We will add back the non cash items in it. Non cash items are depreciation, amortization & loss on sale of assets.

(3) If there is any gain on sale of assets then it will be subtracted from net income.

(4) Then we will adjust the net income due to changes in current assets & current liabilities. First we will take current assets from the balance sheet. If there is an increase in current assets in the current year in relation to previous year, then this increased amount will be deducted from the net income and if there is a decrease in current assets in current year in relation to previous year, then we will add this decreased amount to the net income.

(5) Similarly, we will take current liabilities from the balance sheet. If there is an increase in current liabilities in current year in relation to previous year, then it will be added to the net income and if there is a decrease in current liabilities in current year in relation to previous year then this decreased amount will be deducted from the net income.

(6) Resulting figure is the net cash provided (used) in operating activities.