Question

What are the different methods for computing operating cash flow, and when are they important?

Answer 1

There are two methods of calculating Operating cash flow.

1 Direct Method (Operating Cash Flow = Total Revenue - Operating Expenses) - In this we subtract operating expenses from total revenues. This method is simple and accurate,.drawback of this method is it doesn't give much information about company, company operations, cash sources. hence US gaap requires companies to use Indirect method.

2 Indirect Method (Operating Cash Flow = Net Income +/- Changes in Assets & Liabilities + Non cash expenses) - In this method we adjust net income for changes in all non-cash accounts.

As a investor people analyze cash flow compared with other ratios as they can not easy to amend by management. Like other ratios which can be manipulated by management ,cash flows are not easy to amend.
company earns cash and spends cash.