Question3.7 Which of the following is (are) conceptually and mathematically correct to derive operating cash flow (OCF) from the net income (NI) (2 marks)?The acronyms used in the answers are:OCF: Operating cash flow,NI: Net income,D&A: Depreciation & Amortisation,AR: Accounts receivable,INV: Inventory,AP: Accounts Payable.(Choose one or more correct answers applied. Negative marking applied to incorrect choice.) OCF = NI + D&A - AR increase - INV increase - AP decrease OCF = NI + D&A - AR increase - INV increase - AP increase OCF = NI + D&A + AR decrease + INV decrease + AP increase OCF = NI + D&A - AR increase - INV increase + AP increase OCF = NI - D&A + AR decrease + INV decrease + AP increase ResetMaximum marks: 2 Flag question undefined多项选择题
A
OCF = NI + D&A - AR increase - INV increase - AP decrease
B
OCF = NI + D&A - AR increase - INV increase - AP increase
C
OCF = NI + D&A + AR decrease + INV decrease + AP increase
D
OCF = NI + D&A - AR increase - INV increase + AP increase
E
OCF = NI - D&A + AR decrease + INV decrease + AP increase

Question

Question3.7 Which of the following is (are) conceptually and mathematically correct to derive operating cash flow (OCF) from the net income (NI) (2 marks)?The acronyms used in the answers are:OCF: Operating cash flow,NI: Net income,D&A: Depreciation & Amortisation,AR: Accounts receivable,INV: Inventory,AP: Accounts Payable.(Choose one or more correct answers applied. Negative marking applied to incorrect choice.) OCF = NI + D&A - AR increase - INV increase - AP decrease OCF = NI + D&A - AR increase - INV increase - AP increase OCF = NI + D&A + AR decrease + INV decrease + AP increase OCF = NI + D&A - AR increase - INV increase + AP increase OCF = NI - D&A + AR decrease + INV decrease + AP increase ResetMaximum marks: 2 Flag question undefined多项选择题

A

OCF = NI + D&A - AR increase - INV increase - AP decrease

B

OCF = NI + D&A - AR increase - INV increase - AP increase

C

OCF = NI + D&A + AR decrease + INV decrease + AP increase

D

OCF = NI + D&A - AR increase - INV increase + AP increase

E

OCF = NI - D&A + AR decrease + INV decrease + AP increase

BlackTom AI · Accepted Answer

Net income is accrual-based, so to get operating cash flow (OCF) you must add back noncash charges and adjust for changes in working capital: OCF = NI + noncash items (D&A) − change in accounts receivable − change in inventory + change in accounts payable. Using Δ to denote a change (positive for an increase): OCF = NI + D&A − ΔAR − ΔINV + ΔAP. Step-by-step derivation and mapping: 1. Start with NI (accrual profit). 2. Add noncash expenses (Depreciation & Amortisation): + D&A. 3. Working capital adjustments: - If AR increases (ΔAR > 0), cash collected is lower than revenue, so subtract ΔAR. If AR decreases (ΔAR < 0), subtracting ΔAR is equivalent to adding the AR decrease magnitude (i.e., + AR decrease). - If INV increases, cash tied up in inventory rises, so subtract ΔINV. If INV decreases, subtracting ΔINV equals adding the INV decrease magnitude (+ INV decrease). - If AP increases (ΔAP > 0), you postpone cash payments so add ΔAP. If AP decreases (ΔAP < 0), adding ΔAP is equivalent to subtracting the AP decrease magnitude (i.e., − AP decrease). Thus the general algebraic form is: OCF = NI + D&A − ΔAR − ΔINV + ΔAP. Translate to the answer options: - Option "OCF = NI + D&A - AR increase - INV increase + AP increase" directly matches the general form (subtract AR and INV increases; add AP increases). This is correct. - Option "OCF = NI + D&A + AR decrease + INV decrease + AP increase" is algebraically equivalent because AR decrease = −ΔAR and INV decrease = −ΔINV; substituting gives NI + D&A − ΔAR − ΔINV + ΔAP. This is also correct. Why the other choices are incorrect: - "OCF = NI + D&A - AR increase - INV increase - AP decrease": although subtracting an AP decrease numerically gives the same result when AP actually decreases, this formulation mixes inconsistent sign conventions and fails to represent the general ΔAP term (+ΔAP) explicitly; standard, unambiguous forms use +AP increase or −AP decrease consistently with the general formula. Exams expect the ΔAP sign as + when AP increases, so this option is not a standard correct representation. - "OCF = NI + D&A - AR increase - INV increase - AP increase": wrong sign for AP (should add AP increase, not subtract). - "OCF = NI - D&A + AR decrease + INV decrease + AP increase": wrong treatment of D&A (should be added back, not subtracted). Conclusion: The correct choices are the two forms that match OCF = NI + D&A − ΔAR − ΔINV + ΔAP, i.e. "OCF = NI + D&A + AR decrease + INV decrease + AP increase" and "OCF = NI + D&A - AR increase - INV increase + AP increase", matching the provided answers.

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