Accounting & auditingLesson 5 of 6 in the course Financial Statements

Operating Cash Flow, Free Cash Flow, and Cash Timing

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Operating cash flow shows how much cash a firm generates or uses through its primary business activities. This lesson explains how operating cash flow is calculated and why decisions about customer collections and vendor payments affect cash timing.

Operating cash flow (OCF), also called net cash flow from operating activities, measures cash generated or used by a firm’s core operations. It focuses on cash rather than accounting profit, so it accounts for noncash expenses and changes in current assets and current liabilities.

All flashcards

What is operating cash flow?
Cash generated or used by a firm’s primary business activities.
Why is depreciation added back under the indirect method?
It reduces accounting income but does not use cash in the current period.
How do customer payment terms affect cash management?
They influence how long a firm waits to collect cash after providing goods or services.
How can vendor payment terms influence cash timing?
Longer payment terms can let a firm retain cash longer before paying suppliers.
What is the formula for free cash flow?
Free Cash Flow = Operating Cash Flow - Capital Expenditures.

Quiz questions

  1. After operating needs and capital expenditures are covered, what does positive free cash flow indicate?Answer: Cash remains beyond those operating and capital-asset needs.
  2. Which is a possible use of positive free cash flow?Answer: Repaying debt, paying dividends, or supporting working capital.
  3. How can cash flow forecasting help a firm?Answer: It can identify a potential cash gap early enough to plan.
  4. How can an open bank line of credit help during a temporary cash shortage?Answer: It lets the firm borrow temporarily and repay when cash becomes available.
  5. What should a firm consider when changing customer or vendor payment terms?Answer: Business relationships, industry expectations, and its ability to fund operations.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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