Certified Financial Management Specialist Practice Exam

What constitutes net operating cash flow?

1. Revenue minus Tax Liabilities

2. Sum of net income, depreciation, and amortization

3. Total cash inflow from investing activities

4. Sales revenue minus refunds and discounts

The correct answer is: Sum of net income, depreciation, and amortization

Net operating cash flow is a measure of the cash generated by a company's core business operations, and it is typically calculated by taking net income and adding back non-cash charges such as depreciation and amortization. This approach is essential because net income is influenced by accrual accounting principles, which can obscure the actual cash position of the business. By adding back depreciation and amortization, which are accounting entries rather than cash outflows, the calculation provides a clearer picture of the cash that remains from operating activities. This is critical for evaluating the operating performance of a business, as it reflects the actual cash available to the company for reinvestment, debt repayment, or distribution to shareholders after covering operating expenses. In contrast, the other options relate to different financial metrics or specific components of the financial statement that do not directly pertain to the net operating cash flow. For example, tax liabilities focus only on costs associated with taxes rather than overall cash generation from operations, while cash inflows from investing activities deal specifically with cash transactions related to investments rather than operational activities. Similarly, sales revenue minus refunds and discounts pertains to revenue calculation rather than a comprehensive cash flow analysis.