In comparing accounting net income and operating cash flow, name two items you typically find in...

Question:

In comparing accounting net income and operating cash flow, name two items you typically find in net income that are not in operating cash flow. Explain what each is and why it is excluded in operating cash flow.

Operating cash flow (OCF)

Operating cash flow or OCF is the quantity of the cash generated each year by a project of business from its regular operational activities for a specific time. All the capital expenditures are excluded in the OCF calculation.

As good OCF indicates the sustainability of the business, as if the OCF is an indicator of financial health, if OCF generated sufficiently, it can be used in the future growth of the business.

Answer and Explanation:

Cost 1: Depreciation

Depreciation is an expense that is non-cash in nature and to be booked according to the accounting principle followed by the organization. As it is a non-cash expenses, included in the net income but not included in the OCF calculation.

Cost 2: Amortization

As deprecation is calculated for tangible asset, amortization is used for intangible asset (like patent, trademark etc.) It is calculated as writing down gradually the cost of those intangible assets for a specified life. Similarly like depreciation, it is calculated while deriving the net income but do not included in the OCF.


Learn more about this topic:

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Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4
10K

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