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BUS 312Unit 2

Earnings are an opinion. Cash is a fact.

Operating cash flow, net capital spending and the change in net working capital, then where the cash went: creditors and shareholders. Change any number and watch the identity still balance.

From accounting income to cash · Step 1 of 10

Where the cash comes from, and where it goes

The firm's assetsOCF − NCS − ΔNWC$570Creditorsinterest − new borrowing−$20Shareholdersdividends − new equity$590CFFA
CFFA = operating cash flow − net capital spending − change in NWC
Balance sheet ($000)20262025
Cash180150
Accounts receivable360300
Inventory510450
Total current assets1,050900
Net fixed assets2,9502,700
Total assets4,0003,600
Accounts payable300280
Notes payable150170
Total current liabilities450450
Long-term debt1,2501,100
Common stock800800
Retained earnings1,5001,250
Total liabilities and equity4,0003,600
Assets = liabilities + equity?BalancesBalances
Cedar Ridge Manufacturing Ltd.
Income statement
Year ended 2026 ($ thousands)
Sales
5,000
Cost of goods sold
(3,400)
Depreciation
(350)
Earnings before interest and taxes (EBIT)
1,250
Interest paid
(130)
Taxable income
1,120
Taxes at 25%
(280)
Net income
840
A firm's assets (its plant, machines and inventory) produce cash: cash flow from assets (CFFA). That cash has only two places to go: to creditors (the lenders) and to shareholders (the owners). So we can count it twice, once from each side, and the two counts must match. That is the cash flow identity.
Try it: Tap a box in the diagram. Then open Edit the statements and type in any company's numbers: every step recomputes.
Focus on
Using Cedar Ridge Manufacturing Ltd.
Cash flow from assets
$570
To creditors
−$20
To shareholders
$590
Cash flow from assets = operating cash flow − net capital spending − change in net working capital. What day-to-day operations produced, less what was put back into fixed assets and working capital.
$570 = −$20 + $590
Cash the assets produce has nowhere else to go. If your two sides disagree, you have an arithmetic error.
Practise

Practise like it is the midterm

All amounts are in $ thousands. Answer first, then check. Fresh numbers builds a new company every time, with balance sheets that always balance.

Score
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Operating cash flowQuestion 1 of 14
Birchwood Outfitters had sales of $3,600, cost of goods sold of $2,300, depreciation of $280 and interest paid of $100 (all $ thousands). The tax rate is 25%. What is operating cash flow?
$

Midterm coming up and cash flow still feels slippery?

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