Cash flow from assetsis the total cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, capital spending and change in net working capital.
Operating cash flow is the cash generated from a firm's normal business activities. Operating cash flow is equal to revenues minus costs, excluding depreciation and interest. Depreciation expense is excluded because it does not represent an actual cash flow; interest expense is excluded because it represents a financing expense.
Look back at U.S. Corporation's income statement
(Table 2.2). We see that earnings before interest and taxes (EBIT)
are $694, after deducting $65 depreciation. Adding back the noncash deduction
for depreciation, and subtracting the $212 in current taxes, the firm's
operating cash flow is:
|
1996 Operating Cash Flow |
|
| Earnings before interest and taxes |
$694
|
| + Depreciation |
65
|
| - Taxes |
212
|
| Operating cash flow |
$547
|
Capital spendingis just money spent on fixed assets less money received from the sale of fixed assets.
At the end of 1995, net fixed assets fro U.S. Corporation (Table 2.1) were $1,644. During the year, U.S. wrote off (depreciated) $65 worth of fixed assets on the income statement. So, if the firm didn't purchases any new fixed assets, net fixed assets would have been $1,6444 - 65 = $1,579 at year's end. The 1996 balance sheet shows $1,709 in net fixed assets, so U.S. must have spent a total of $1,709 -1,579 = $130 on fixed assets during the year:
| Ending net fixed assets |
$1,709
|
| - Beginning net fixed assets |
1,644
|
| + Depreciation |
65
|
| Net capital spending |
$ 130
|
Change in net working capital
A firm invets in both current and fixed assets. As the firm changes its investment in current assets, its current liablitilites will usually change as well. To determine the change in net working capital, the easiest appraach is just to take the difference between the beginning and ending net working capital (NWC) figures. For example, going back to the balance sheets in Table 2.1, we see that net working capital at the end of 1996 was $1,403 - 389 = $1,014. Similarly, at the end of 1995, net working cpaital was $1,112 - 428 = $684. So, given these figures, we have:
| Ending NWC |
$1,014
|
| - Beginning NWC |
684
|
| Change in NWC |
$ 330
|
The total cash flow from assets can be calculated as operating cash flow, less net capital spending, less any additions to net working capital. So, for U.S., we have:
|
1996 Operating Cash Flow |
|
| Operaging cash flow |
$540
|
| - Net capital spending |
130
|
| - Change in NWC |
330
|
| Cash flow from assets |
$87
|
