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  • the_nervous_resistor the_nervous_resistor May 13, 2003 4:02 PM Flag


    Oh yikes. Brain pain is kicking in, from old accounting course.

    My recollection is that you can compute cash flow from operations from net income, less depreciation and capital expenditures, if you include changes in accounts receivable and accounts payable. Working capital is already booked in accounts payable.

    Hypothetical example:

    Net income is $100.
    Depreciation allowance is $20.
    Capital expenditures are $30.
    So far, I have $100-$20-$30 = $50.

    An increase in cash flow comes from reductions in accounts receivable and increases in accounts payable. Pay slow, collect fast. And, in tough times, pay slower and collect faster.

    Suppose you collected better than last year, so accounts receivable dropped $10. (Sales changes are in net income.) And suppose you spent less on operations or you strung out your suppliers longer, so acc pay is up $15.

    So, cash flow from operations is $50 plus $10 plus $15, for $75.

    Investments produce non-operating effects on cash flow, where cash on hand goes down in return for stock or warrants. Also, dividend payments simultaneously reduce the dividend payable and cash accounts. So, in this example, if you made no investment payments, and if you paid a $25 dividend, then the net cash flow is $50.

    I bet someone out there will blow holes through all of this, but this is how I think alot of ordinary folks out there think about cash flow.

    [And, not speaking of cash flow, does anyone out there in the ether know of a good source of high power (1Amp peak) high inductance (10-30 mH) inductors - not surface mounted. LOL. This is what I am supposed to be doing right now.]


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    • Double yikes. A couple errors in the hypothetical example. (And here I am trying to help my kids with their math!)

      The depreciation is not handled properly. The hypothetical cash flow should be $100+$20-$30 = $90. Similarly, after payable/receivable adjustments, the added $40 carries through for $90.


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