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Worked-example setupScope and assumptions
- Reported operating cash flow and net income belong to the same entity and Year 5 period.
- The supplied indirect adjustments are correctly classified for the bounded fictional facts.
- Net income is positive for both entities, so the optional ratio is defined under the module convention.
- One year does not establish persistence, quality, intent, or valuation.
- Period
- Year 5 ended December 31
- Units
- Whole USD for gaps; cash-to-income ratio in times
- Rounding
- Full precision internally; ratios displayed to two decimals
Start with amounts and gaps
| Entity | Net income | Operating cash flow | OCF − income | OCF ÷ income |
|---|---|---|---|---|
| Beacon | $24,000 | $30,000 | +$6,000 | 1.25× |
| Harbor | $24,000 | $18,000 | −$6,000 | 0.75× |
The ratios are available because both net-income denominators are positive. If income were zero or negative, this module would omit the quotient and retain the amounts, gap, and bridge.
Reconcile Beacon
$24,000 net income
+ 10,000 depreciation
− 3,000 Accounts Receivable increase
− 2,000 Inventory increase
+ 1,000 Accounts Payable increase
= $30,000 operating cash flow
The operating-balance adjustments use $4,000 cash net; depreciation adds back a $10,000 noncash income effect. Together they create the positive $6,000 gap.
Reconcile Harbor
$24,000 net income
+ 8,000 depreciation
− 5,000 Accounts Receivable increase
− 7,000 Inventory increase
− 2,000 Accounts Payable decrease
= $18,000 operating cash flow
Harbor's operating-balance changes use $14,000 cash in the bridge, more than its $8,000 noncash adjustment. The result is $6,000 below net income.
Interpretation
The calculation supports a directional observation: Harbor has more cash tied up in the three supplied operating balances during Year 5. It does not identify the cause. Receivables may reflect late sales or weak collection; inventory may support expected demand or move slowly; payables may fall because of favorable liquidity or tighter supplier terms.
Request aging, turnover and demand data, credit terms, purchasing records, subsequent collections and sales, supplier terms, and multiple-period bridges. Only then can a stronger persistence or quality claim be evaluated.
Keep free cash flow beside, not inside, the reconciliation
Suppose the analyst defines free cash flow as operating cash flow minus purchases of property, plant, and equipment. The investing section reports $12,000 for Beacon and $8,000 for Harbor. The screen is:
| Entity | Operating cash flow | Declared capital-expenditure input | Free-cash-flow screen |
|---|---|---|---|
| Beacon | $30,000 | $(12,000) | $18,000 |
| Harbor | $18,000 | $(8,000) | $10,000 |
That subtraction is an analyst-defined reconciliation, not a GAAP subtotal. The label does not prove the capital spending was discretionary, sufficient, or growth-oriented, and another analyst may define the measure differently. Preserve the exact formula, source lines, and exclusions before comparing it with another entity or period.
Common wrong paths
- Call depreciation cash generated: the addback removes a noncash income effect; it does not create a receipt.
- Rank one-year quality from 1.25 and 0.75: the bridge and recurrence matter.
- Force a ratio around a bad denominator: use the gap when net income is zero, negative, or too small for a stable interpretation.
- Treat free cash flow as standardized or spendable cash: state the formula and investigate commitments, maintenance needs, financing, and omitted cash demands before drawing that conclusion.
Verified calculation · cash income comparison analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- scenarios
- 2 fields
Inspect data
{
"beacon": {
"net_income": 24000,
"operating_cash_flow": 30000,
"reported_gap": 6000,
"reported_ratio": 1.25
},
"harbor": {
"net_income": 24000,
"operating_cash_flow": 18000,
"reported_gap": -6000,
"reported_ratio": 0.75
}
}Recomputed result
| Measure | Value |
|---|---|
| beacon operating cash flow gap | 6,000 |
| beacon operating cash flow to net income | 1.25 |
| harbor operating cash flow gap | -6,000 |
| harbor operating cash flow to net income | 0.75 |