Cash Flow from Assets

	Financial Cash Flow

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	Cash Flow from Assets

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	Financial Cash Flow Equations

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	Financial Cash Flow Exercise

	Financial Cash Flow Quiz

Cash Flow from Assets

The Cash Flow from Assets measures the cash flows generated by the firm's assets. It is also known as the Cash Flow of the Firm. These cash flows will be further categorized as Operating Cash Flow, Capital Spending, and Additions to Net Working Capital. The calculations illustrated on this page will refer to the Balance Sheet and Income Statement which follow.

Balance Sheet ($ in Millions)
Assets	1998	1997	Liabilities and Owners' Equity	1998	1997
Current Assets			Current Liabilities
Cash	690	600	Accounts Payable	530	460
Accounts Receivable	340	300	Notes Payable	240	240
Inventory	120	100	Total Current Liabilities	770	700
Total Current Assets	1150	1000	Long-Term Liabilities
			Long-Term Debt	571	710
Fixed Assets			Total Long-Term Liabilities	571	710
Property, Plant, and Equipment	1210	1200	Owners' Equity
Less Accumulated Depreciation	357	280	Common Stock ($1 Par)	122	120
Net Fixed Assests	853	920	Capital Surplus	218	210
			Retained Earnings	322	180
			Total Owners' Equity	662	510
Total Assets	2003	1920	Total Liab. and Owners' Equity	2003	1920

Income Statement ($ in Millions)
	1998
Sales	1710
Cost of Goods Sold	1100
Administrative Expenses	100
Depreciation	77
Earnings Before Interest and Taxes	423
Interest Expense	50
Taxable Income	373
Taxes	30
Net Income	343
Dividends	201
Addition to Retained Earnings	142

Operating Cash Flow

Operating Cash Flow measures the cash flows generated by the firm's main operations. (In effect, the ability of the firm to sell its products for more than the cost of production.) Operating Cash Flow can be determined as follows:

Operating Cash Flow = EBIT + Depreciation - Taxes

The calculation begins with EBIT (Earnings before Interest and Taxes) because Interest Expense is not a cash flow that operations are dependent upon. Interest Expense reflects how the firm chooses to finance its assets, not its ability to operate them successfully. Depreciation Expense (from the Income Statement) is added back because it is a non-cash expense which was subtracted out in the determination of EBIT. Finally, the taxes which the firm actually paid in cash during the period are subtracted.

Operating Cash Flow Example

Using information from the above Balance Sheet and Income Statement.

Solution:

Operating Cash Flow = $423 + $77 - $30 = $470

Capital Spending

Capital Spending reflects the firm's net investment in fixed assets during the period. It can be calculated as follows:

Capital Spending = Ending Net Fixed Assets

- Beginning Net Fixed Assets

+ Depreciation

In this calculation, Depreciation Expense (from the Income Statement) must be added back because the balance for Ending Net Fixed Assets on the Balance Sheet is reduced by the Depreciation Expense which was incurred during the period.

Capital Spending Example

Using information from the above Balance Sheet and Income Statement.

Solution:

Capital Spending = $853 - $920 + $77 = $10

Additions to Net Working Capital

Additions to Net Working Capital measure the firm's investment in Net Working Capital during the period. Net Working Capital (NWC) is defined as Current Assets minus Current Liabilities.

Additions to NWC = Ending NWC - Beginning NWC

Additions to Net Working Capital Example

Using information from the above Balance Sheet and Income Statement.

Solution:

Ending NWC = Ending CA - Ending CL = $1150 - $770 = $380

Beginning NWC = Beginning CA - Beginning CL = $1000 - $700 = $300

Additions to NWC = $380 - $300 = $80

Cash Flow from Assets

Once the above items have been determined, the Cash Flow from the Firm's Assets can be calculated as follows:

Cash Flow from Assets = Operating Cash Flow

- Capital Spending

- Additions to NWC

A healthy firm would be expected to generate positive cash flow. However, if the firm is young and/or is investing heavily to promote growth, then a negative Cash Flow from the Firm's Assets may be excused.

Cash Flow from Assets Example

Using information from the previous examples.

Solution:

Cash Flow from Assets = $470 - $10 - $80 = $380