Question

Hammett, Inc., has sales of $19,630, costs of $9,400, depreciation expense of $2,070, and interest expense of $1,560. Assume the tax rate is 30 percent. (Enter your answer as directed, but do not round intermediate calculations.)

Required:

What is the operating cash flow?

Operating cash flow

Answer 1

Operating cash flow is the cash generated from normal operating activities of the business. Examples of operating cash flows include cash received from sales, collection of accounts receivable, cash paid to suppliers and employees, interest and tax expenses etc. Operating cash flows indicates whether the business is generating sufficient positive cash from its operation.

There are two ways to calculate operating cash flows,

1. Direct method

Operating cash flow = Total revenue - Operating expenses

Calculation

Total revenue 19630

costs (9400)

Interest expenses (1560)

tax @30% (1980)

Operating cash flow 6690

note: Tax is calculated on income after deducting depreciation. Here taxable income is 19630 - (9400+1560+2070) = 6600. Tax expense = 6600*30% = 1980

2. Indirect method

Operating cash flow = Net income + Non cash expenses - Increase in working capital

Indirect method is the commonly used method as it provides more information.Using this method net income is converted to cash flow from operating activities.

Calculation of net income

Sales 19630

Costs   (9400)

Depreciation (2070)

Interest expense (1560)

Earnings before tax 6600

Tax @30%   (1980)

Earnings after tax 4620

Calculation of operating cash flow

Net income 4620

Depreciation 2070

Operating cash flow 6690