Cash flow from assets

This topic is on Operating cash flow… I understand that in order to get the proper results from operating cash flow depreciation must be added and taxes subtracted. My question to you guys - The phrasing of the concept is a bit confusing to me… To calculate operating cash flow, we want to calculate revenues minus cost, but we don’t want to include depreciation since its not a cash outflow, and we dont want to include interest because its a financing expense. We do include taxes because it is paid with cash. When calculating OCF, I always add depr and subtract taxes. The way its worded makes me want to subtract depr and add taxes…Am I the only one confused about this? I know this is a bit elementary but if someone could shed some light…

It sounds to me like you’re convoluting things. CFO can be calculated using either the direct method or the indirect method. Both achieve the same result. I recommend revisiting your texts on the differences, then if you have additional, more specific questions, it’ll be easier for us to assist you. Another important point is that under U.S. GAAP, interest expense must be classified as CFO. In fact, all interest and dividend flows are CFO, with the exception of dividends paid, which are a CFF outflow. What CFAI is advocating is that for analytical purposes, interest expense is the cost of debt and it makes sense to treat it as a CFF (rather than CFO) outflow. The distinction I’m trying to make here is that it’s important to understand U.S. GAAP’s requirements vs. CFAI’s suggested analytical treatments. Moreover, just to complicate matters, I’m pretty sure LI candidates are required to know some of the differences between U.S. and IAS GAAP. IAS GAAP allows some discretion over the classification of interest and dividend flows, which can fall under operating or financing categories. In addition, once you’re more comfortable calculating CFO, it’ll be tremendously helpful to you in the corporate finance capital budgeting LOS, which I expect will require you to calculate the cash flows from capital projects. Happy hunting.

Thank you Hired