Multiple Choice
Which of the following lists the four steps in preparing a statement of cash flows in the correct order?
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13. Statement of Cash Flows
Introduction to the Statement of Cash Flows
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To calculate the operating cash flow (OCF) using the bottom-up approach, which of the following should be added to net income?
A
Non-cash expenses such as depreciation and amortization
B
Gains from the sale of equipment
C
Cash received from issuing stock
D
Dividends paid
Verified step by step guidance1
Understand the concept of Operating Cash Flow (OCF): OCF represents the cash generated by a company's core business operations. The bottom-up approach starts with net income and adjusts for non-cash items and changes in working capital.
Identify non-cash expenses: Non-cash expenses like depreciation and amortization are added back to net income because they reduce net income but do not involve actual cash outflows.
Exclude gains or losses from the sale of equipment: Gains from the sale of equipment are excluded because they are not part of operating activities; they are part of investing activities.
Exclude cash received from issuing stock: Cash received from issuing stock is a financing activity, not an operating activity, so it is not included in the calculation of OCF.
Exclude dividends paid: Dividends paid are also a financing activity and do not impact the calculation of OCF using the bottom-up approach.
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