Question

How to identify material differences between reported operating cash flow and sustainable operating cash flow?

What I don't know is ...

1. How to set materiality

2. How to lead sustainable operating cash flow

1,813 20 6 509 O Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred income taxes Provision for inventories Depreciation and amortization Loss on disposal of property and equipment Amortization and write-off of capitalized software development costs and intellectual property licenses Premium payment for early redemption of note Amortization of debt discount and debt financing costs Stock-based compensation expense Other Changes in operating assets and liabilities: Accounts receivable Inventories Software development and intellectual property licenses Other assets Deferred revenues Accounts payable Accrued expenses and other liabilities Net cash provided by operating activities 489 0 46 209 1 (114) (5) (372) (51) (122) (65) (574) 1,790

In the above cash flow, all the related elements such as AP and AR seem reasonable for me because cash generates while paying AP and collecting not an excessive amount of AR.

Answer 1

The sustainable operating cash flow is the one where there always exists a positive cash flow with a constant cash balance as per the requirement of the company.

The materiality of the operating cash flow exists at the points like receivable, payable, depreciation and amortization and maintaining a operating level of current assets like inventory, supplies and consumables etc.

As per the reported and provided Cash flow of the Operating Activities, there is a good generation of cash from the operations, but due to rise in the collection period and decline in the payment/payable period, there is a heavy outflow of cash in the period. Considering the depreciation and amortization of assets figure, the company has to keep heavy cash balance as cash would be available whenever the assets come under replacement.

Thus, the provided/ reported operating cash flow is a sustainable cash flow because the operating cash does not deviate much from the profits declared in the financial results. The reported operating cash flow has a set-back of rise in the recovery days from the debtors. There should be a constant recovery or reduction in the recovery days.

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