Financial Management

Posted: October 17th, 2013

Financial Management







Financial Management

Cash flow is a financial statement in accounting that is used to show the flow of money from various sources such as cash flow from operating activities, financing activities and investing activities. It shows both inflow and outflow of the cash (Pinson, 2008). It shows activities illustrating how the balance sheet is changing as well as the income statement. In simpler terms, it represents the activities that are indicated in the balance sheet and the income statement. Operating cash flow in a company represents the cash that is generated from the operating activities such as sales, or revenues, without including the long-term investments and securities. It serves several purposes such as providing information on the liquidity of a company, information for evaluation of changes in assets, and indicating future cash flows.

Operating cash flow as explained is the proceeds of money from the operating activities, which include receipts from sales of produced goods and services, sale of loans, interests received on loan, and payments for suppliers, services, interests, and tax (Nikolai, Bazley & Jones, 2009). Therefore, in calculating the operating cash flow, the payments made are subtracted from the receipts received. Operating cash flow is calculated by adding depreciation to operating profit and subtracting taxation. Thus, the operating cash flow for Gerry Co will be as follows:

Item Amount in $
Gross profit 880,000
Selling and administration costs (120,000)
Depreciation expense (360,000)
Operating income (PBIT) 400,000
Taxation at 40% (160,000)


Operating Cash Flow == operating profit + depreciation – tax

== $ 400,000 + $360,000 – $160,000

== $ 600,000

The operating cash flow or cash from operating activities for Gerry Co is $600,000. Considering the operating cash flow is positive, it indicates that the company is making profit from its sales.




Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2009). Intermediate Accounting. South Western Cengage Learning.

Pinson, L. (2008). Anatomy of a business plan: A step-by-step guide to building the business and securing your company’s future. Tustin, CA: aka associates.

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