Interpret, in words, what cash flow of the firm represents by discussing operating cash flow, changes in net working capital, and additions to fixed assets.
Cash flow of firm represents everything like net working capital changes, operating cash flow, and additions to fixed assets and all these things are a part of a firm’s cash flow and also play an important role in both firm’s cash inflow and out flow.
Operating cash flow is cash flow being generated by the normal operations of business and is really important because it is basically the indication of firm’s ability in generating adequate as well as positive cash flows for the business for maintenance and growth of operations or the required cash flow for external financing. It is important because the financial analysts look down on the cash flow metrics of firm always to know exact realism of the firm’s situation regarding its financial stability (Almeida, Campello & Michael, 2004).
Net working capital change is also an important part of firm’s cash flow statement and is basically difference between current assets and current liabilities and the working capital is day-to-day activity in case of well running firms. Positive change in the net working capital is always welcomed and is represented by a cash inflow for the period.
Additions to the fixed assets is a part of cash flow statement which may result in the cash out flow but for benefit of firm in its operations either by addition of part of plant or the whole new plant for the firm. These additions to fixed assets are helpful for firm’s increased prospective or production capacity and are not only infused with repairs of plant assets but also help in the maintenance of useful life of the plant assets.