When given the Sales, Variable Expenses, Fixed expenses and Depreciation, I know how to come up with the Net Operating income. But to get the Net Cash Inflow, do I add the depreciation back to the Net operating income?:confused:
Please help
Example:
Sales ---------------- $3,000,000
minus
Variable Expenses ---$1,800,000
equals
Contribution Margin--$1,200,000

Fixed Expenses------- $700,000
plus
Depreciation-------------$300,000
equals
Total fixed Expenses---$1,000,000

Contribution Margin $1,200,000
minus
Fixed Expenses $1,000,000
equals
Net Operating Income $200,000

I am thinking that I have to add back the $300,000 Depreciation to the Net Operating Income of $200,000 to get the Net Cash Inflow. Is this correct? Am I headed in the right direction?

Quote:

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Originally Posted by msdarcel01

I am thinking that I have to add back the $300,000 Depreciation to the Net Operating Income of $200,000 to get the Net Cash Inflow. Is this correct? Am I headed in the right direction?

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Yes.

Depreciation is something that is not a cash outflow, but it's still subtracted to get to net income. Technically, if you wanted to get to cash you'd have to do many more adjustments than just this, but that's not really what the problem is about. Just pretend that all sales are actually collected in the same period. And pretend that all expenses are paid in the same period. The depreciation then becomes the one thing that cash was never, ever paid for. So it subtracted out to get to net income, so you add back in to get rid of it.