Question

Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as:

A) Net Income + Depreciation
B) (Sales - Costs) x (1-tax rate)
C) EBIT - Depreciation + Taxes
D) EBIT - Taxes
E) EBIT x (1-Tax Rate) + Depreciation x Tax Rate

Answer 1

The correct answer is: Option C) EBIT - Depreciation + Taxes.

Step-by-step explanation:

The operating cash flow can be computed by starting with EBIT and then adding back depreciation and subtracting taxes.

The operating cash flow can be computed by starting with EBIT (Earnings Before Interest and Taxes) and then adding back depreciation and subtracting taxes.

Depreciation is a non-cash expense, meaning it does not involve actual cash outflows, so it is added back to EBIT. Taxes, on the other hand, are actual cash outflows and are subtracted from EBIT.