Why should depreciation and amortization be added to the gross operating cash flow?

Gross operating cash flow = net operating profit after tax.

Depreciation and amortization.

This indicator assumes that in the future continuous operation of the enterprise, the total cash flow that the enterprise can provide to investors without additional long-term and short-term capital investment.

Why add depreciation. Because depreciation is in the course of business, fixed assets are renewed for the future.

The reserved funds are calculated on an accrual basis when calculating net profit.

This part of the cost is deducted, but there is no outflow of funds, so depreciation should be added back when calculating the cash flow statement on a cash basis.

Correspondingly, at the time of capital budgeting, although depreciation does not flow out, it can be deducted as a deduction of profits, and depreciation is regarded as an inflow. If the asset is leased and the depreciation is deductible, this becomes an outflow.

The word "hair" can be removed. "Business" rather than "business", which includes fund-raising operations.

That's how I understand it, friend. Depreciation and amortization* (1-25%) is the so-called after-tax depreciation and amortization, that is, the non-cash cost actually deducted from the operating income, which is consistent with the understanding in your question; Depreciation and amortization*25% is the tax shield, so the amount of income tax deduction for operating profit is depreciation and amortization*25%. In summary, part of the non-cash cost is added back, and part of the income tax for the calculation of operating profit has a deductible effect, and the two parts add up to exactly 1 times the depreciation and amortization.

Depreciation and amortization are not actual expenses, but only accrual data, and there is no real cash outflow.

The idea of gross operating cash flow comes from the cash flow statement. Since all the cash expenditure has been deducted at the time of the initial investment of the asset, the subsequent depreciation is calculated as a non-cash inflow as if it were accrual (the accounting tax method will include the cost, and then the profit will be written off), the gross operating cash flow = operating income - cash cost - income tax = operating income - (cost and expense - depreciation and amortization) - income tax, and the formula can be obtained to obtain the gross operating cash flow = pre-tax operating profit - income tax + depreciation and amortization. (where income tax is the result of deducting depreciation and amortization), thinking about it, it can be concluded that the depreciation and amortization added here is actually a tax deduction inflow of depreciation and amortization.

Because long-term assets are depreciated or amortized in each period, the value-added of long-term assets that we obtain in the financial statements is the balance after deducting depreciation or amortization, and the actual capital expenditure is the original value of long-term assets, so we need to add back the value of depreciation and amortization to the value-added of long-term assets that have been deducted for depreciation or amortization.

Because the increase in operating working capital = current operating assets - current operating liabilities = increase in net short-term operating assets, capital expenditure = increase in long-term assets + accumulated depreciation and amortization = increase in net long-term operating assets.

So in fact, the final result of all the process calculations is: physical cash flow = net operating profit after tax - increase in net operating assets.

Because long-term assets are depreciated or amortized in each period, the value-added of long-term assets that we obtain in the financial statements is the balance after deducting depreciation or amortization, and the actual capital expenditure is the original value of long-term assets, so we need to add back the value of depreciation and amortization to the value-added of long-term assets that have been deducted for depreciation or amortization.

Because the increase in operating working capital = current operating assets - current operating liabilities = increase in net short-term operating assets, capital expenditure = increase in long-term assets + accumulated depreciation and amortization = increase in net long-term operating assets.

So in fact, the end result of all this process calculation is: physical cash flow = net operating profit after tax - increase in net operating assets.

Landlord, you copied the wrong formula.

Gross Operating Cash Flow - Net Increase in Operating Working Capital - (Increase in Net Operating Long-Term Assets + Depreciation & Amortization).

Net operating profit after tax + depreciation and amortization - net increase in operating working capital - (increase in net operating long-term assets + depreciation and amortization).

About formula understanding.

The first two items of "after-tax operating net profit + depreciation and amortization" can be understood as the cash flow generated by operating activities, of which depreciation and amortization should be added, because when calculating the after-tax operating net profit, depreciation has been deducted as a cost expense, but it is not a cash payment cost, and there is no cash outflow, so depreciation and amortization should be added when calculating cash flow;

The last three items can be understood as the cash flow generated by operating investment activities, and the total investment in net operating long-term assets in the following brackets is the total investment in net operating long-term assets, which includes depreciation and amortization because the total investment in net operating long-term assets refers to the expenditure on the purchase of long-term assets in the current period, but the increase in long-term assets of net operating assets gives the net value after deducting depreciation and amortization, and only with the depreciation and amortization of the current period is the increase in long-term asset investment in the current period.

"Increase in net operating long-term assets + depreciation and amortization" is not deduced from those two formulas, we can understand them separately.

Net increase in operating working capital, net operating profit after tax, and increase in net operating long-term assets are independent of each other and can be found in .

For the definition of physical cash flow, please refer to the 2011 CPA Financial Management Textbook P160

If there is an error, please feel free to point it out. There are too many nouns here, so don't worry.

Pig Association! Why is the noun still called differently every year!!

"The last three items can be understood as the cash flow generated by operating investment activities, and the total investment in net operating long-term assets in the following brackets is the total investment in net operating long-term assets, which includes depreciation and amortization because the total investment in net operating long-term assets refers to the expenditure on the purchase of long-term assets in the current period, but the increase in long-term assets of net operating assets gives the net value after deducting depreciation and amortization, and only with the depreciation and amortization of the current period is the increase in long-term asset investment in the current period. "

I think there are some problems with this paragraph, and the analysis of the first two "net operating profit after tax + depreciation and amortization" is correct.

"Net increase in operating working capital" is the outflow of cash from current assets in operating activities;

Increase in net operating long-term assets + depreciation and amortization", compared with the cash flow outflow from current assets in the previous period, this item is the cash flow from fixed assets.

In particular, operating cash flow (gross operating cash flow) refers to the total cash flow from the enterprise.

If you think about it, in accounting, depreciation and amortization are included in administrative expenses and manufacturing expenses, right? Therefore, when calculating the net operating profit after tax, the management expenses and manufacturing expenses have been subtracted. However, this part does not actually affect the cash flow, but only the provision of fixed assets and intangible assets should be made in accounting.

But in fact, this part of the money did not flow out of the enterprise, so it was necessary to add him back. When deducting management expenses and manufacturing expenses, it is before tax, so it is also before tax when it is added back. . . That's how I understand it!

Gross Operating Cash Flow Operating Income Cash Cost Income Tax Operating Income (Operating Costs Depreciation and Amortization) Income Tax Operating Profit Depreciation and Amortization Income Tax Net Profit After Tax Depreciation and Amortization (Income Cash Cost Depreciation and Amortization) (1 Tax Rate) Depreciation and Amortization Income (1 Tax Rate) Cash Cost (1 Tax Rate) Depreciation and Amortization Tax Rate Income After Tax After-tax Cash Cost Depreciation and Amortization Tax Rate.

Friend, I thought about it myself for a long time, and then solved it with an example, you see right:

In fact, it should be understood in this way, for example, all the total profits on my side are 1 million, then I have to pay 250,000 taxes, this is to the tax department, on the surface I just earned 1 million, in fact, this 1 million miles contains all the depreciation I subtracted, and all of these depreciation are used to deduct taxes (that is, the income should be subtracted from this part of the depreciation, and finally it is tax), in fact, all this money is my income (because I deduce the cash flow from the net profit), which was covered up by me with depreciation, So when calculating my own gross operating cash flow, I use the net profit after tax operating net profit (this indicator is actually for the tax department to see) to add depreciation and amortization should be full depreciation and amortization, because these depreciation and amortization are fully covering my business flow, and I have to add them all back.