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Cash collections are the principle components of CFO. These are the actual
cash received during the accounting period from customers. They are defined as:
Formula 6.7
Cash Collections Receipts from Sales
= Sales + Decrease (or - increase) in Accounts Receivable
Cash payment for purchases make up the most important cash outflow
component in CFO. It is the actual cash dispersed for purchases from suppliers
during the accounting period. It is defined as:
Formula 6.8
Cash payment for operating expenses is the cash outflow related to selling
general and administrative (SG&A), research and development (R&A) and other
liabilities such as wage payable and accounts payable. It is defined as:
Formula 6.9
Cash interest is the interest paid to debt holders in cash. It is defined as:
Formula 6.10
Cash payment for income taxes is the actual cash paid in the form of taxes. It is
defined as:
Formula 6.11
Cash payments for income taxes
= income taxes + decrease (or - increase) in income taxes payable
The diagram below demonstrates how net cash flow from operations is derived using the
direct method.
Though the methods used differ, the results are always the same.