Final answer:
To calculate the operating cash flow using the bottom-up approach, you start with net income and adjust for non-cash expenses and changes in working capital. This differs from economic or accounting profit, as OCF emphasizes cash from operations.
Step-by-step explanation:
To calculate the operating cash flow (OCF) using the bottom-up approach, we begin with net income and make adjustments for non-cash expenses and changes in working capital. The net income is typically found on a company's income statement and represents the profit after all expenses, including taxes and interest, have been subtracted from revenue. However, the OCF focuses on the cash generated from operating activities, and therefore, certain non-cash expenses like depreciation and changes in working capital accounts (such as accounts receivable, accounts payable, and inventory) are added back to or subtracted from the net income.
While the information provided talks about calculating economic profit and accounting profit, these are separate concepts from the OCF. Economic profit considers both explicit costs (like materials and labor) and implicit costs (like opportunity costs), while accounting profit only considers explicit costs. In contrast, operating cash flow is a measure of the actual cash generated by a business's core operations, which is imperative for assessing a company's ability to maintain and grow its operations.