Definition of Operating Cash Flow

Operating cash flows means operating profit adjusted for non-cash items and working capital changes. There are two methods to reach operating cash flows in the cash flows statement. Using the indirect method the EBIT also called operating profit in accounting, but this includes impacts of non-cash items. Items like depreciation and amortization are added back to operating profit as it had reduced the profits. Then next if there is any gain on the sale of any fixed asset that has increased the profits is deducted from operating profit.

After that any changes in accounts receivables, inventories, and accounts payables. Any decrease in inventories and accounts receivable levels is taken as cash inflow and is added to operating profit. Any increase in accounts payable is taken as cash inflows, and any decrease in accounts payable is considered as cash outflow.

After all the above adjustments, we reach the operating cash flows.