assignment c calculating components of operating statements

Practical C Programming, 3rd Edition by Steve Oualline

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Chapter 4. Basic Declarations and Expressions

A journey of a thousand miles must begin with a single step.

If carpenters made buildings the way programmers make programs, the first woodpecker to come along would destroy all of civilization.

Elements of a Program

If you are going to construct a building, you need two things: the bricks and a blueprint that tells you how to put them together. In computer programming, you need two things: data (variables) and instructions (code or functions). Variables are the basic building blocks of a program. Instructions tell the computer what to do with the variables.

Comments are used to describe the variables and instructions. They are notes by the author documenting the program so that the program is clear and easy to read. Comments are ignored by the computer.

In construction, before we can start, we must order our materials: “We need 500 large bricks, 80 half-size bricks, and 4 flagstones.” Similarly, in C, we must declare our variables before we can use them. We must name each one of our “bricks” and tell C what type of brick to use.

After our variables are defined, we can begin to use them. In construction, the basic structure is a room. By combining many rooms, we form a building. In C, the basic structure is a function. Functions can be combined to form a program.

An apprentice builder does not start out building the Empire State Building, but rather starts on a one-room house. In this chapter, we will concentrate on constructing simple one-function programs.

Basic Program Structure

The basic elements of a program are the data declarations, functions, and comments. Let’s see how these can be organized into a simple C program.

The basic structure of a one-function program is:

Heading comments tell the programmer about the program, and data declarations describe the data that the program is going to use.

Our single function is named main . The name main is special, because it is the first function called. Other functions are called directly or indirectly from main . The function main begins with:

and ends with:

The line return(0); is used to tell the operating system (UNIX or MS-DOS/Windows) that the program exited normally (Status=0). A nonzero status indicates an error—the bigger the return value, the more severe the error. Typically, a status of 1 is used for the most simple errors, like a missing file or bad command-line syntax.

Now, let’s take a look at our Hello World program ( Example 3-1 ).

At the beginning of the program is a comment box enclosed in /* and */ . Following this box is the line:

This statement signals C that we are going to use the standard I/O package. The statement is a type of data declaration. [ 5 ] Later we use the function printf from this package.

Our main routine contains the instruction:

This line is an executable statement instructing C to print the message “Hello World” on the screen. C uses a semicolon ( ; ) to end a statement in much the same way we use a period to end a sentence. Unlike line-oriented languages such as BASIC, an end-of-line does not end a statement. The sentences in this book can span several lines—the end of a line is treated just like space between words. C works the same way. A single statement can span several lines. Similarly, you can put several sentences on the same line, just as you can put several C statements on the same line. However, most of the time your program is more readable if each statement starts on a separate line.

The standard function printf is used to output our message. A library routine is a C procedure or function that has been written and put into a library or collection of useful functions. Such routines perform sorting, input, output, mathematical functions, and file manipulation. See your C reference manual for a complete list of library functions.

Hello World is one of the simplest C programs. It contains no computations; it merely sends a single message to the screen. It is a starting point. After you have mastered this simple program, you have done a number of things correctly.

Simple Expressions

Computers can do more than just print strings—they can also perform calculations. Expressions are used to specify simple computations. The five simple operators in C are listed in Table 4-1 .

Multiply ( * ), divide ( / ), and modulus ( % ) have precedence over add ( + ) and subtract (-). Parentheses, ( ), may be used to group terms. Thus:

yields 12, while:

Example 4-1 computes the value of the expression (1 + 2) * 4 .

Although we calculate the answer, we don’t do anything with it. (This program will generate a “null effect” warning to indicate that there is a correctly written, but useless, statement in the program.)

Think about how confused a workman would be if we were constructing a building and said,

“Take your wheelbarrow and go back and forth between the truck and the building site.” “Do you want me to carry bricks in it?” “No. Just go back and forth.”

We need to store the results of our calculations.

Variables and Storage

C allows us to store values in variables . Each variable is identified by a variable name .

In addition, each variable has a variable type . The type tells C how the variable is going to be used and what kind of numbers (real, integer) it can hold. Names start with a letter or underscore ( _ ), followed by any number of letters, digits, or underscores. Uppercase is different from lowercase, so the names sam , Sam , and SAM specify three different variables. However, to avoid confusion, you should use different names for variables and not depend on case differences.

Nothing prevents you from creating a name beginning with an underscore; however, such names are usually reserved for internal and system names.

Most C programmers use all-lowercase variable names. Some names like int , while , for , and float have a special meaning to C and are considered reserved words . They cannot be used for variable names.

The following is an example of some variable names:

The following are not variable names:

Avoid variable names that are similar. For example, the following illustrates a poor choice of variable names:

A much better set of names is:

Variable Declarations

Before you can use a variable in C, it must be defined in a declaration statement .

A variable declaration serves three purposes:

It defines the name of the variable.

It defines the type of the variable (integer, real, character, etc.).

It gives the programmer a description of the variable. The declaration of a variable answer can be:

The keyword int tells C that this variable contains an integer value. (Integers are defined below.) The variable name is answer . The semicolon ( ; ) marks the end of the statement, and the comment is used to define this variable for the programmer. (The requirement that every C variable declaration be commented is a style rule. C will allow you to omit the comment. Any experienced teacher, manager, or lead engineer will not.)

The general form of a variable declaration is:

where type is one of the C variable types ( int , float , etc.) and name is any valid variable name. This declaration explains what the variable is and what it will be used for. (In Chapter 9 , we will see how local variables can be declared elsewhere.)

Variable declarations appear just before the main() line at the top of a program.

One variable type is integer. Integer numbers have no fractional part or decimal point. Numbers such as 1, 87, and -222 are integers. The number 8.3 is not an integer because it contains a decimal point. The general form of an integer declaration is:

A calculator with an 8-digit display can only handle numbers between 99999999 and -99999999. If you try to add 1 to 99999999, you will get an overflow error. Computers have similar limits. The limits on integers are implementation dependent, meaning they change from computer to computer.

Calculators use decimal digits (0-9). Computers use binary digits (0-1) called bits. Eight bits make a byte. The number of bits used to hold an integer varies from machine to machine. Numbers are converted from binary to decimal for printing.

On most UNIX machines, integers are 32 bits (4 bytes), providing a range of 2147483647 (2 31 -1) to -2147483648. On the PC, most compilers use only 16 bits (2 bytes), so the range is 32767 (2 15 -1) to -32768. These sizes are typical. The standard header file limits.h defines constants for the various numerical limits. (See Chapter 18 , for more information on header files.)

The C standard does not specify the actual size of numbers. Programs that depend on an integer being a specific size (say 32 bits) frequently fail when moved to another machine.

Question 4-1 : The following will work on a UNIX machine, but will fail on a PC :

Why does this fail? What will be the result when it is run on a PC? (Click here for the answer Section 4.12 )

Assignment Statements

Variables are given a value through the use of assignment statements. For example:

is an assignment. The variable answer on the left side of the equal sign ( = ) is assigned the value of the expression (1 + 2) * 4 on the right side. The semicolon ( ; ) ends the statement.

Declarations create space for variables. Figure 4-1 A illustrates a variable declaration for the variable answer . We have not yet assigned it a value so it is known as an uninitialized variable . The question mark indicates that the value of this variable is unknown.

Assignment statements are used to give a variable a value. For example:

is an assignment. The variable answer on the left side of the equals operator ( = ) is assigned the value of the expression (1 + 2) * 4 . So the variable answer gets the value 12 as illustrated in Figure 4-1 B.

The general form of the assignment statement is:

The = is used for assignment. It literally means: Compute the expression and assign the value of that expression to the variable. (In some other languages, such as PASCAL, the = operator is used to test for equality. In C, the operator is used for assignment.)

In Example 4-2 , we use the variable term to store an integer value that is used in two later expressions.

A problem exists with this program. How can we tell if it is working or not? We need some way of printing the answers.

printf Function

The library function printf can be used to print the results. If we add the statement:

the program will print:

The special characters %d are called the integer conversion specification . When printf encounters a %d , it prints the value of the next expression in the list following the format string. This is called the parameter list .

The general form of the printf statement is:

where format is the string describing what to print. Everything inside this string is printed verbatim except for the %d conversions. The value of expression-1 is printed in place of the first %d , expression-2 is printed in place of the second, and so on.

Figure 4-2 shows how the elements of the printf statement work together to generate the final result.

The format string "Twice %d is %d\n" tells printf to display Twice followed by a space, the value of the first expression, then a space followed by is and a space, the value of the second expression, finishing with an end-of-line (indicated by \n ).

Example 4-3 shows a program that computes term and prints it via two printf functions.

The number of %d conversions in the format should exactly match the number of expressions in the printf . C will not verify this. (Actually, the GNU gcc compiler will check printf arguments, if you turn on the proper warnings.) If too many expressions are supplied, the extra ones will be ignored. If there are not enough expressions, C will generate strange numbers for the missing expressions.

Floating Point

Because of the way they are stored internally, real numbers are also known as floating-point numbers. The numbers 5.5, 8.3, and -12.6 are all floating-point numbers. C uses the decimal point to distinguish between floating-point numbers and integers. So 5.0 is a floating-point number, while 5 is an integer. Floating-point numbers must contain a decimal point. Floating-point numbers include: 3.14159, 0.5, 1.0, and 8.88.

Although you could omit digits before the decimal point and specify a number as .5 instead of 0.5, the extra clearly indicates that you are using a floating-point number. A similar rule applies to 12. versus 12.0. A floating-point zero should be written as 0.0.

Additionally, the number may include an exponent specification of the form:

For example, 1.2e34 is a shorthand version of 1.2 x 10 34 .

The form of a floating-point declaration is:

Again, there is a limit on the range of floating-point numbers that the computer can handle. This limit varies widely from computer to computer. Floating-point accuracy will be discussed further in Chapter 16 .

When a floating-point number using printf is written , the %f conversion is used. To print the expression 1.0/3.0 , we use this statement:

Floating Point Versus Integer Divide

The division operator is special. There is a vast difference between an integer divide and a floating-point divide. In an integer divide, the result is truncated (any fractional part is discarded). So the value of 19/10 is 1.

If either the divisor or the dividend is a floating-point number, a floating-point divide is executed. So 19.0/10.0 is 1.9. (19/10.0 and 19.0/10 are also floating-point divides; however, 19.0/10.0 is preferred for clarity.) Several examples appear in Table 4-2 .

C allows the assignment of an integer expression to a floating-point variable. C will automatically perform the conversion from integer to floating point. A similar conversion is performed when a floating-point number is assigned to an integer. For example:

Notice that the expression 1 / 2 is an integer expression resulting in an integer divide and an integer result of 0.

Question 4-2 : Why is the result of Example 4-4 0.0”? What must be done to this program to fix it? (Click here for the answer Section 4.12 )

Question 4-3 : Why does 2 + 2 = 5928? (Your results may vary. See Example 4-5 .) (Click here for the answer Section 4.12 )

Question 4-4 : Why is an incorrect result printed? (See Example 4-6 .) (Click here for the answer Section 4.12 )

The type char represents single characters. The form of a character declaration is:

Characters are enclosed in single quotes ( ' ). 'A' , 'a' , and '!' are character constants. The backslash character (\) is called the escape character . It is used to signal that a special character follows. For example, the characters \ " can be used to put a double quote inside a string. A single quote is represented by \' . \n is the newline character. It causes the output device to go to the beginning of the next line (similar to a return key on a typewriter). The characters \\ are the backslash itself. Finally, characters can be specified by \ nnn , where nnn is the octal code for the character. Table 4-3 summarizes these special characters. Appendix A contains a table of ASCII character codes.

While characters are enclosed in single quotes ( ' ), a different data type, the string, is enclosed in double quotes ( " ). A good way to remember the difference between these two types of quotes is to remember that single characters are enclosed in single quotes. Strings can have any number of characters (including one), and they are enclosed in double quotes.

Characters use the printf conversion %c . Example 4-7 reverses three characters.

When executed, this program prints:

Answer 4-1 : The largest number that can be stored in an int on most UNIX machines is 2147483647. When using Turbo C++, the limit is 32767. The zip code 92126 is larger than 32767, so it is mangled, and the result is 26590.

This problem can be fixed by using a long int instead of just an int . The various types of integers will be discussed in Chapter 5 .

Answer 4-2 : The problem concerns the division: 1/3 . The number 1 and the number 3 are both integers, so this question is an integer divide. Fractions are truncated in an integer divide. The expression should be written as:

Answer 4-3 : The printf statement:

tells the program to print a decimal number, but there is no variable specified. C does not check to make sure printf is given the right number of parameters. Because no value was specified, C makes one up. The proper printf statement should be:

Answer 4-4 : The problem is that in the printf statement, we used a %d to specify that an integer was to be printed, but the parameter for this conversion was a floating-point number. The printf function has no way of checking its parameters for type. So if you give the function a floating-point number, but the format specifies an integer, the function will treat the number as an integer and print unexpected results.

Programming Exercises

Exercise 4-1 : Write a program to print your name, social security number, and date of birth.

Exercise 4-2 : Write a program to print a block E using asterisks ( * ), where the E has a height of seven characters and a width of five characters.

Exercise 4-3 : Write a program to compute the area and perimeter of a rectangle with a width of three inches and a height of five inches. What changes must be made to the program so that it works for a rectangle with a width of 6.8 inches and a length of 2.3 inches?

Exercise 4-4 : Write a program to print “HELLO” in big block letters; each letter should have a height of seven characters and width of five characters.

Exercise 4-5 : Write a program that deliberately makes the following mistakes:

Prints a floating-point number using the %d conversion.

Prints an integer using the %f conversion.

Prints a character using the %d conversion.

[ 5 ] Technically, the statement causes a set of data declarations to be taken from an include file. Chapter 10 , discusses include files.

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• Engineering Mathematics
• Discrete Mathematics
• Operating System
• Computer Networks
• Digital Logic and Design
• C Programming
• Data Structures
• Theory of Computation
• Compiler Design
• Computer Org and Architecture

Components of Operating System

• Functions of Operating System
• MS-DOS Operating System
• Concurrency in Operating System
• IoT Operating Systems
• History of Operating System
• Boot Block in Operating System
• Architecture of IOS Operating System
• Context Switch in Operating System
• Memory Management in Operating System
• Last Minute Notes – Operating Systems
• Kernel in Operating System
• Need and Functions of Operating Systems
• Different Operating Systems
• Handheld Operating System
• Components Of Information System
• Components of Image Processing System
• Commonly Used Operating System
• Components of Control Systems
• Gentoo Linux Operating System

An Operating system is an interface between users and the hardware of a computer system. It is a system software that is viewed as an organized collection of software consisting of procedures and functions, providing an environment for the execution of programs. The operating system manages resources of system software and computer hardware resources. It allows computing resources to be used in an efficient way. Programs interact with computer hardware with the help of operating system. A user can interact with the operating system by making system calls or using OS commands.

Important Components of the Operating System:

• Process management
• Files management
• Command Interpreter
• System calls
• Network management
• Security management
• I/O device management
• Secondary storage management
• Main memory management

Process Management :

A process is a program in execution. It consists of the followings:

• Executable program
• Program’s data
• Stack and stack pointer
• Program counter and other CPU registers 
• Details of opened files

A process can be suspended temporarily and the execution of another process can be taken up. A suspended process can be restarted later. Before suspending a process, its details are saved in a table called the process table so that it can be executed later on. An operating system supports two system calls to manage processes Create and Kill –

• Create a system call used to create a new process.
• Kill system call used to delete an existing process.

A process can create a number of child processes. Processes can communicate among themselves either using shared memory or by message-passing techniques. Two processes running on two different computers can communicate by sending messages over a network.

Files Management :

Files are used for long-term storage. Files are used for both input and output. Every operating system provides a file management service. This file management service can also be treated as an abstraction as it hides the information about the disks from the user. The operating system also provides a system call for file management. The system call for file management includes –

• File creation
• File deletion
• Read and Write operations

Files are stored in a directory. System calls provide to put a file in a directory or to remove a file from a directory. Files in the system are protected to maintain the privacy of the user. Below shows the Hierarchical File Structure directory.

Command Interpreter :

There are several ways for users to interface with the operating system. One of the approaches to user interaction with the operating system is through commands. Command interpreter provides a command-line interface . It allows the user to enter a command on the command line prompt (cmd). The command interpreter accepts and executes the commands entered by a user. For example, a shell is a command interpreter under UNIX. The commands to be executed are implemented in two ways:

• The command interpreter itself contains code to be executed.
• The command is implemented through a system file. The necessary system file is loaded into memory and executed.

System Calls :

System calls provide an interface to the services made by an operating system. The user interacts with the operating system programs through System calls. These calls are normally made available as library functions in high-level languages such as C, Java, Python etc. It provides a level of abstraction as the user is not aware of the implementation or execution of the call made. Details of the operating system is hidden from the user. Different hardware and software services can be availed through system calls.

System calls are available for the following operations:

• Process Management
• Memory Management
• File Operations
• Input / Output Operations  

Signals are used in the operating systems to notify a process that a particular event has occurred. Signals are the software or hardware interrupts that suspend the current execution of the task. Signals are also used for inter-process communication. A signal follows the following pattern :

• A signal is generated by the occurrence of a particular event it can be the clicking of the mouse, the execution of the program successfully or an error notifying, etc.
• A generated signal is delivered to a process for further execution.
• Once delivered, the signal must be handled.
• A signal can be synchronous and asynchronous which is handled by a default handler or by the user-defined handler.

The signal causes temporarily suspends the current task it was processing, saves its registers on the stack, and starts running a special signal handling procedure, where the signal is assigned to it.

Network Management :

In today’s digital world, the complexity of networks and services has created modern challenges for IT professionals and users. Network management is a set of processes and procedures that help organizations to optimize their computer networks. Mainly, it ensures that users have the best possible experience while using network applications and services.

Network management is a fundamental concept of computer networks. Network Management Systems is a software application that provides network administrators with information on components in their networks. It ensures the quality of service and availability of network resources. It also examines the operations of a network, reconstructs its network configuration, modifies it for improving performance of tasks.

Security Management:

The security mechanisms in an operating system ensure that authorized programs have access to resources, and unauthorized programs have no access to restricted resources. Security management refers to the various processes where the user changes the file, memory, CPU, and other hardware resources that should have authorization from the operating system. 

I/O Device Management :

The I/O device management component is an I/O manager that hides the details of hardware devices and manages the main memory for devices using cache and spooling. This component provides a buffer cache and general device driver code that allows the system to manage the main memory and the hardware devices connected to it. It also provides and manages custom drivers for particular hardware devices. 

The purpose of the I/O system is to hide the details of hardware devices from the application programmer. An I/O device management component allows highly efficient resource utilization while minimizing errors and making programming easy on the entire range of devices available in their systems. 

Secondary Storage Management : 

Broadly, the secondary storage area is any space, where data is stored permanently and the user can retrieve it easily. Your computer’s hard drive is the primary location for your files and programs. Other spaces, such as CD-ROM/DVD drives, flash memory cards, and networked devices, also provide secondary storage for data on the computer. The computer’s main memory (RAM) is a volatile storage device in which all programs reside, it provides only temporary storage space for performing tasks. Secondary storage refers to the media devices other than RAM (e.g. CDs, DVDs, or hard disks) that provide additional space for permanent storing of data and software programs which is also called non-volatile storage.

Main memory management :

Main memory is a flexible and volatile type of storage device. It is a large sequence of bytes and addresses used to store volatile data. Main memory is also called Random Access Memory (RAM), which is the fastest computer storage available on PCs. It is costly and low in terms of storage as compared to secondary storage devices. Whenever computer programs are executed, it is temporarily stored in the main memory for execution. Later, the user can permanently store the data or program in the secondary storage device.

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7.3: Financial Statement Analysis

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At this point, you have learned quite a bit about financial accounting. This includes the process of analyzing a wide variety of transactions, recording them in the journal, maintaining running account balances, and summarizing theinformation in the financial statements.

Businesses publish financial statements to communicate information about their operating performance and economic health. The income statement shows the profitability of a business by presenting its revenue and expenses for a period of time and summarizes its profitability in one final result: net income. The retained earnings statement reports all of the profit that a business has accumulated since it began operations. The balance sheet is a comprehensive summary report that lists a business’s assets, liabilities, owner investments, and accumulated profit. Examples of basic financial statements appear below.

Once the financial statements are available, the next step is to analyze them to gleen useful information about a corporation’s performance over time and its current financial health. These insights help business managers and investors make decisions about future courses of action. Areas of weakness may be identified and followed up with appropriate measures for improvement. Elements of strength should be reinforced and continued.

Much of this financial statement analysis is accomplished using ratios that reveal how one amount relates to another. One or more amounts are divided by other amount(s), yielding a decimal or percentage amount. However, no ratio is particularly meaningful by itself; it needs to be compared to something else, such as desired or expected results, previous results, other companies’ results, or industry standards. This comparison lets you know where you stand in terms of whether you are doing better, worse, or the same as what you have expected or hoped for.

ANNUAL CHECK-UP

Many people visit a doctor annually for a check-up to evaluate their overall health. This often involves a physician looking, listening, poking, prodding, weighing, and conducting tests to assess the strength and wellness of multiple body parts and the status of vital signs and chemical levels.

The results may be positive in some areas and less so in others. One deficiency or ailment may impact the body as a whole. As weaknesses are uncovered, measures such as medication, procedures, exercise, diet changes, etc. may be prescribed to assist with recovery.

For example, if high cholesterol levels and excessive weight are discovered, lifestyle changes and medication may be recommended. At the following year’s visit, subsequent testing will reveal the progress made over time in these areas as well as other diagnostic results on that particular date. The goal is to continuously address deficiencies for improvement and to maintain positive outcomes on an ongoing basis.

A similar process is used for determining the operational and financial health of a corporation. The financial statements represent the current condition of an organization as a whole for a period of time. Probing, testing, and spot-checking efforts are conducted on a number of its parts to verify areas of strength and to pinpoint weaknesses. Action plans for improvement may then be prescribed to address substandard line items going forward.

7.3.1 Horizontal analysis

Important information can result from looking at changes in the same financial statement over time, both in terms of dollar amounts and percentage differences. Comparative financial statements place two years (or more) of the same statement side by side. A horizontal analysis involves noting the increases and decreases both in the amount and in the percentage of each line item. The earlier year is typically used as the base year for calculating increases or decreases in amounts.

A horizontal analysis of a firm’s 2018 and 2019 income statements appears to the left. The first two columns show income statement amounts for two consecutive years. The amount and percentage differences for each line are listed in the final two columns, respectively.

The presentation of the changes from year to year for each line item can be analyzed to see where positive progress is occuring over time, such as increases in revenue and profit and decreases in cost. Conversely, less favorable readings may be isolated using this approach and investigated further.

In this sample comparative income statement, sales increased 20.0% from one year to the next, yet gross profit and income from operations increased quite a bit more at 33.3% and 60.0%, respectively. However, the final net incomeamount increased only 7.4%. Changes between the income from operations and net income lines can be reviewed to identify the reasons for the relatively lower increase in net income.

Likewise, the following is a horizontal analysis of a firm’s 2018 and 2019 balance sheets. Again, the amount and percentage differences for each line are listed in the final two columns, respectively.

The horizontal analysis to the left uses a firm’s 2018 and 2019 balance sheets. Again, the amount and percentage differences for each line are listed in the final two columns, respectively.

The increase of $344,000 in total assets represents a 9.5% change in the positive direction. Total liabilities increased by 10.0%, or $116,000, from year to year. The change in total stockholders’ equity of $228,000 is a 9.3% increase. There seems to be a relatively consistent overall increase throughout the key totals on the balance sheet.

7.3.2 Vertical Analysis

A vertical analysis may also be conducted to each financial statement to report the percentage of each line item to a total amount.

On the comparative income statement, the amount of each line item is divided by the sales number, which is the largest value.

On the comparative balance sheet, the amount of each line item is divided by the total assets amount, which is the largest value (and which equals total liabilities and stockholders’ equity.)

On both financial statements, percentages are presented for two consecutive years so that the percent changes over time may be evaluated.

7.3.3 Common-size Statements

The use of percentages converts a company’s dollar amounts on its financial statements into values that can be compared to other companies whose dollar amounts may be different.

Common-size statements include only the percentages that appear in either a horizontal or vertical analysis. They often are used to compare one company to another or to compare a company to other standards, such as industry averages.

The following compares the performance of two companies using a vertical analysis on their income statements for 2019.

7.3.4 Ratio Analysis

Horizontal and vertical analyses present data about each line item on the financial statements in a uniform way across the board. Additional insight about a corporation’s financial performance and health can be revealed by calculating targeted ratios that use specific amounts that relate to one another. Again, as stated earlier, no ratio is meaningful by itself; it needs to be compared to something, such as desired or expected results, previous results, other companies’ results, or industry standards.

There are a series of ratios that are commonly used by corporations. These will be classified as liquidity, solvency, profitability, and return on investment.

Liquidity analysis looks at a company’s available cash and its ability to quickly convert other current assets into cash to meet short-term operating needs such as paying expenses and debts as they become due. Cash is the most liquid asset; other current assets such as accounts receivable and inventory may also generate cash in the near future.

Creditors and investors often use liquidity ratios to gauge how well a business is performing. Since creditors are primarily concerned with a company’s ability to repay its debts, they want to see if there is enough cash and equivalents available to meet the current portions of debt.

Six liquidity ratios follow. The current and quick ratios evaluate a company’s ability to pay its current liabilities. Accounts receivable turnover and number of days’ sales in receivables look at the firm’s ability to collect its accounts receivable. Inventory turnover and number of days’ sales in inventory gauge how effectively a company manages its inventory.

CURRENT RATIO

What it measures: The ability of a firm to pay its current liabilities with its cash and/or other current assets that can be converted to cash within a relatively short period of time.

\(\ \text{Calculation:} \frac{\text { Current assets }}{\text { Current liabilities }}=\frac{911,000}{364,000}=2.5\)

Interpretation : This company has 2.5 times more in current assets than it has in current liabilities. The premise is that current assets are liquid; that is, they can be converted to cash in a relatively short period of time to cover short-term debt. A current ratio is judged as satisfactory on a relative basis. If the company prefers to have a lot of debt and not use its own money, it may consider 2.5 to be too high – too little debt for the amount of assets it has. If a company is conservative in terms of debt and wants to have as little as possible, 2.5 may be considered low – too little asset value for the amount of liabilities it has. For an average tolerance for debt, a current ratio of 2.5 may be considered satisfactory. The point is that whether the current ratio is considered acceptable is subjective and will vary from company to company.

QUICK RATIO

What it measures: the ability of a firm to pay its current liabilities with its cash and other current assets that can be converted to cash within an extremely short period of time . Quick assets include cash, accounts receivable, and marketable securities but do not include inventory or prepaid items.

\(\ \text{Calculation:} \frac{\text { Quick assets }}{\text { Current liabilities }}=\frac{373,000+248,000+108,000}{364,000}=2.0\)

Interpretation: This company has 2.0 times more in its highly liquid current assets, which include cash, marketable securities, and accounts receivable, than it has in current liabilities. The premise is these current assets are the most liquid and can be immediately converted to cash to cover short-term debt. Current assets such as inventory and prepaid items would take too long to sell to be considered quick assets. A quick ratio is judged as satisfactory on a relative basis. If the company prefers to have a lot of debt and not use its own money, it may consider 2.0 to be too high – too little debt for the amount of assets it has. If a company is conservative in terms of debt and wants to have as little as possible, 2.0 may be considered low – too little asset value for the amount of liabilities it has. For an average tolerance for debt, a current ratio of 2.0 may be considered satisfactory. The point is that whether the quick ratio is considered acceptable is subjective and will vary from company to company.

ACCOUNTS RECEIVABLE TURNOVER

What it measures: the number of times the entire amount of a firm’s accounts receivable, which is the monies owed to the company by its customers, is collected in a year.

\(\ \text{Calculation:} \frac{\text { Sales }}{\text { Average accounts receivable }}=\frac{994,000}{(108,000 + 91,000)/2}=10.0\)

Interpretation: The higher the better. The more often customers pay off their invoices, the more cash available to the firm to pay bills and debts and less possibility that customers will never pay at all.

NUMBER OF DAYS’ SALES IN RECEIVABLES

What it measures: the number of days it typically takes for customers to pay on account.

\(\ \text{Calculation:} \frac{\text { Average accounts receivable }}{\text { Sales / } 365}=\frac{(108,000+91,000) / 2}{994,000 / 365}=36.5 days\)

The denominator of “Sales / 365” represents the dollar amount of sales per day in a 365-day year.

Interpretation: The lower the better. The less time it takes customers to pay off their invoices, the more cash available to the firm to pay bills and debts and less possibility that customers will never pay at all.

INVENTORY TURNOVER

What it measures: the number of times the average amount of a firm’s inventory is sold in a year.

\(\ \text{Calculation:} \frac{\text { Cost of merchandise sold }}{\text { Average inventory }}=\frac{414,000}{(55,000 + 48,000)/2}=8.0\)

Interpretation: The higher the better. The more often inventory is sold, the more cash generated by the firm to pay bills and debts. Inventory turnover is also a measure of a firm’s operational performance. If the company’s line of business is to sell merchandise, the more often it does so, the more operationally successful it is.

NUMBER OF DAYS’ SALES IN INVENTORY

What it measures: the number of days it typically takes for a typical batch of inventory to be sold.

\(\ \text{Calculation}: \frac{\text {Average inventory }}{\text { Cost of merchandise sold/365 }}=\frac{(55,000 + 48,000)/2}{(414,000/365)}=45.4 \text{ days}\)

The denominator of “Cost of merchandise sold / 365” represents the dollar amount of cost per day in a 365-day year.

Interpretation: The lower the better. The less time it takes for the inventory in stock to be sold, the more cash available to the firm to pay bills and debts. There is also less of a need to pay storage, insurance, and other holding costs and less of a chance that inventory on hand will become outdated and less attractive to customers.

Solvency analysis evaluates a company’s future financial stability by looking at its ability to pay its long-term debts.

Both investors and creditors are interested in the solvency of a company. Investors want to make sure the company is in a strong financial position and can continue to grow, generate profits, distribute dividends, and provide a return on investment. Creditors are concerned with being repaid and look to see that a company can generate sufficient revenues to cover both short and long-term obligations.

Four solvency ratios follow.

RATIO OF LIABILITIES TO STOCKHOLDERS’ EQUITY

What it measures: the ability of a company to pay its creditors.

\(\ \text{Calculation}: \frac{\text {Total liabilities }}{\text { Total stockholders’ equity }}=\frac{1,275,000}{2,675,000}=5\)

Interpretation: Favorable vs. unfavorable results are based on company’s level of tolerance for debt Assets are acquired either by investments from stockholders or through borrowing from other parties. Companies that are adverse to debt would prefer a lower ratio. Companies that prefer to use “other people’s money” to finance assets would favor a higher ratio. In this example, the company’s debt is about half of what its stockholders’ equity is. Approximately 1/3 of the assets are paid for through borrowing.

RATIO OF FIXED ASSETS TO LONG-TERM LIABILITIES

What it measures: the availability of investments in property, plant, and equipment that are financed by long-term debt and to generate earnings that may be used to pay off long-term debt.

\(\ \text{Calculation}: \frac{\text {Book value of fixed assets }}{\text { Long-term liabilities }}=\frac{1,093,000}{911,000}=1.2\)

Interpretation: The higher the better. The more that has been invested in fixed assets, which are often financed by long- term debt, the more potential there is for a firm to perform well operationally and generate the cash it needs to make debt payments.

NUMBER OF TIMES INTEREST CHARGES ARE EARNED

What it measures: the ability to generate sufficient pre-tax income to pay interest charges on debt.

\(\ \text{Calculation}: \frac{\text {Income before income tax + interest expense }}{\text { Interest expense }}=\frac{314,000 + 55,000}{55,000}=6.7\)

Since interest expense had been deducted in arriving at income before income tax on the income statement, it is added back in the calculation of the ratio.

Interpretation: The higher the better. The ratio looks at income that is available to pay interest expense after all other expenses have been covered by the sales that were generated. The number of times anything is earned is always more favorable when it is higher since it impacts the margin of safety and the ability to pay as earnings fluctuate, particulary if they decline.

NUMBER OF TIMES PREFERRED DIVIDENDS ARE EARNED

What it measures: the ability to generate sufficient net income to pay dividends to preferred stockholders

\(\ \text{Calculation}: \frac{\text {Net income }}{\text { Preferred dividends }}=\frac{248,000}{12,000}=20.7\)

Interpretation: The higher the better. The ratio looks at net income that is available to pay preferred dividends, which are paid on an after-tax basis, and after all expenses have been covered by the sales that were generated. The number of times anything is earned is always more favorable when it is higher since it impacts the margin of safety and the ability to pay as earnings fluctuate.

Profitability analysis evaluates a corporation’s operational ability to generate revenues that exceed associated costs in a given period of time.

Profitability ratios may incorporate the concept of leverage , which is how effectively one financial element generates a progressively larger return on another element. Thes first five ratios that follow look at how well the assets, liabilities, or equities in the denominator of each ratio are able produce a relatively high value in the respective numerator. Ths final two ratios evaluate how well sales translate into gross profit and net income.

ASSET TURNOVER

What it measures: how effectively a company uses its assets to generate revenue.

\(\ \text{Calculation}: \frac{\text {Sales }}{\text { Average total assets (excluding long-term investments) }}=\frac{994,000}{(3,950,000 - 1,946,000 + 3,606,000 - 1,822,000)/2}=52.5 \)%

Long-term investments are not included in the calculation because they are not productivity assets used to generate sales to customers.

Interpretation: The higher the better. The ratio looks at the value of most of a company’s assets and how well they are leveraged to produce sales. The goal of owning the assets is that they should generate revenue that ultimately results in cash flow and profit.

RETURN ON TOTAL ASSETS

What it measures: how effectively a company uses its assets to generate net income.

\(\ \text{Calculation}: \frac{\text {Net income + Interest expense }}{\text {Average total assets }}=\frac{248,000 + 55,000}{(3,950,000 + 3,606,000)/2}=8.0 \)%

Interest expense relates to financed assets, so it is added back to net income since how the assets are paid for should be irrelevant.

Interpretation: The higher the better. The ratio looks at the value of a company’s assets and how well they are leveraged to produce net income. The goal of owning the assets is that they should generate cash flow and profit.

RETURN ON STOCKHOLDERS’ EQUITY

What it measures: how effectively a company uses the investment of its owners to generate net income.

\(\ \text{Calculation}: \frac{\text {Net income }}{\text { Average total stockholders’ equity }}=\frac{248,000}{(2,675,000 + 2,447,000)/2}= 9.7\)%

Interpretation: The higher the better. The ratio looks at how well the investments of preferred and common stockholders are leveraged to produce net income. One goal of investing in a corporation is for stockholders to accumulate additional wealth as a result of the company making a profit.

RETURN ON COMMON STOCKHOLDERS’ EQUITY (ROE)

What it measures: how effectively a company uses the investment of its common stockholders to generate net income; overall performance of a business.

\(\ \text{Calculation}: \frac{\text {Net income - Preferred dividends }}{\text { Average common stockholders’ equity }}=\frac{248,000 - 12,000}{(83,000 + 2,426,000 + 83,000 + 2,198,000)/2}= 9.9\)%

Preferred dividends are removed from the net income amount since they are distributed prior to commonshareholders having any claim on company profits.

In this example, shareholders saw a 9.9% return on their investment. The result indicates that every dollar of common shareholder’s equity earned about $.10 this year.

EARNINGS PER SHARE ON COMMON STOCK

What it measures: the dollar amount of net income associated with each share of common stock outstanding.

\(\ \text{Calculation}: \frac{\text {Net income - Preferred dividends }}{\text { Number of shares of common stock outstanding }}=\frac{248,000 - 12,000}{83,000/$10}= $28.43\)

Preferred dividends are removed from the net income amount since they are distributed prior to common shareholders having any claim on company profits.

The number of common shares outstanding is determined by dividing the common stock dollar amount by the par value per share given.

Interpretation: The higher the better. The ratio is critical in reporting net income at a micro level – per share – rather than in total. A greater net income amount will result in a higher earnings per share given a fixed number of shares.

GROSS PROFIT PERCENTAGE

What it measures: how effectively a company generates gross profit from sales or controls cost of merchandise sold.

\(\ \text{Calculation}: \frac{\text {Gross profit }}{\text { Sales }}=\frac{580,000}{994,000}= 58.4\)%

Interpretation: The higher the better. The ratio looks at the main cost of a merchandising business – what it pays for the items it sells. The lower the cost of merchandise sold, the higher the gross profit, which can then be used to pay operating expenses and to generate profit.

PROFIT MARGIN

What it measures: the amount of net income earned with each dollar of sales generated.

\(\ \text{Calculation}: \frac{\text {Net income }}{\text { Sales }}=\frac{248,000}{994,000}= 24.9\)%

Interpretation: The higher the better. The ratio shows what percentage of sales are left over after all expenses are paid by the business.

Finally, a Dupont analysis breaks down three components of the return on equity ratio to explain how a company can increase its return for investors. It may be evaluated on a relative basis, comparing a company’s Dupont results with either another company’s results, with industry standards, or with expected or desired results.

DUPONT ANALYSIS

What it measures: a company’s ability to increase its return on equity by analyzing what is causing the current ROE.

Results indicate that Company A has a higher profit margin and greater financial leverage. Its weaker position on total asset turnover as compared to Company B is what brings down its ROE. The analysis of the components of ROE provides insight of areas to address for improvement.

Interpretation: Investors are not looking for large or small output numbers from this model. Investors want to analyze and pinpoint what is causing the current ROE to identify areas for improvement. This model breaks down the return on equity ratio to explain how companies can increase their return for investors.

Return-on-investment analysis looks at actual distributions of current earnings or expected future earnings.

DIVIDENDS PER SHARE ON COMMON STOCK

What it measures: the dollar amount of dividends associated with each share of common stock outstanding.

\(\ \text{Calculation}: \frac{\text {Common stock dividends }}{\text { Number of shares of common stock outstanding }}=\frac{8,000}{83,000/$10}= $0.96\)

Interpretation: If stockholders desire maximum dividends payouts, then the higher the better. However, some stockholders prefer to receive minimal or no dividends since dividend payouts are taxable or because they prefer that their returns be reinvested. Then lower payouts would be better.

The ratio reports distributions of net income in the form of cash at a micro level – per share – rather than in total. A greater dividends per share amount will result from a higher net income amount given a fixed number of shares.

DIVIDENDS YIELD

What it measures: the rate of return to common stockholders from cash dividends.

Assume that the market price per share is $70.00.

\(\ \text{Calculation}: \frac{\text {Common dividends / Common shares outstanding }}{\text { Market price per share }}=\frac{$0.96}{$70.00}= 1.4\)%

Interpretation: If stockholders desire maximum dividend payouts, then the higher the better. However, some stockholders prefer to receive minimal or no dividends since dividend payouts are taxable or because they prefer that their returns be reinvested. Then lower payouts would be better.

The ratio compares common stock distributions to the current market price. This conversion allows comparison between different companies and may be of particular interest to investors who wish to maximize dividend revenue.

PRICE EARNINGS RATIO

What it measures: the prospects of future earnings.

\(\ \text{Calculation}: \frac{\text {Market price per share }}{\text { Common stock earnings per share }}=\frac{$70.00}{$28.43}= 2.5\)

Recall that earnings per share is (Net income – Preferred stock dividends) / Number of shares of common stock.

Interpretation: The higher the better. The more the market price exceeds earnings, the greater the prospect of value growth, particularly if this ratio increases over time.All the analytical measures discussed, taken individually and collectively, are used to evaluate a company’s operating performance and financial strength. They are particularly informative when compared over time to expected or desired standards. The ability to learn from the financial statements makes the processes of collecting, analyzing, summarizing, and reporting financial information all worthwhile.

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• Financial statements: Balance, income, cash flow, and equity

Cash Flow From Operating Activities (CFO) Defined, With Formulas

What Is Cash Flow From Operating Activities (CFO)?

Cash flow from operating activities (CFO) indicates the amount of money a company brings in from its ongoing, regular business activities, such as manufacturing and selling goods or providing a service to customers. It is the first section depicted on a company's cash flow statement .

Cash flow from operating activities does not include long-term capital expenditures or investment revenue and expense. CFO focuses only on the core business, and is also known as operating cash flow (OCF) or net cash from operating activities.

Key Takeaways

• Cash flow from operating activities is an important benchmark to determine the financial success of a company's core business activities.
• Cash flow from operating activities is the first section depicted on a cash flow statement, which also includes cash from investing and financing activities.
• There are two methods for depicting cash from operating activities on a cash flow statement: the indirect method and the direct method.
• The indirect method begins with net income from the income statement then adds back noncash items to arrive at a cash basis figure.
• The direct method tracks all transactions in a period on a cash basis and uses actual cash inflows and outflows on the cash flow statement.

Investopedia / Daniel Fishel

Understanding Cash Flow From Operating Activities (CFO)

Cash flow forms one of the most important parts of business operations and accounts for the total amount of money being transferred into and out of a business. Since it affects the company's  liquidity , it has significance for multiple reasons. It allows business owners and operators check where the money is coming from and going to, it helps them take steps to generate and maintain sufficient cash necessary for operational efficiency and other necessary needs, and it helps in making key and efficient financing decisions.

The details about the cash flow of a company are available in its cash flow statement, which is part of a company's quarterly and annual reports . The cash flow from operating activities depicts the cash-generating abilities of a company's core business activities. It typically includes  net income  from the income statement and adjustments to modify net income from an accrual accounting basis to a cash accounting basis.

Cash availability allows a business the option to expand, build and launch new products, buy back shares to affirm their strong financial position, pay out dividends to reward and bolster shareholder confidence, or reduce debt to save on interest payments. Investors attempt to look for companies whose share prices are lower and cash flow from operations is showing an upward trend over recent quarters. The disparity indicates that the company has increasing levels of cash flow which, if better utilized, can lead to higher share prices in near future.

Positive (and increasing) cash flow from operating activities indicates that the core business activities of the company are thriving. It provides as additional measure/indicator of profitability potential of a company, in addition to the traditional ones like net income or EBITDA .

Cash Flow Statement

The cash flow statement is one of the three main financial statements required in standard financial reporting- in addition to the income statement and balance sheet . The cash flow statement is divided into three sections—cash flow from operating activities,  cash flow from investing activities , and  cash flow from financing activities . Collectively, all three sections provide a picture of where the company's cash comes from, how it is spent, and the net change in cash resulting from the firm's activities during a given accounting period.

The cash flow from investing section shows the cash used to purchase fixed and long-term assets, such as  plant, property, and equipment (PPE) , as well as any proceeds from the sale of these assets. The cash flow from financing section shows the source of a company's financing and capital as well as its servicing and payments on the loans. For example, proceeds from the issuance of stocks and bonds , dividend payments, and interest payments will be included under financing activities.

Investors examine a company’s cash flow from operating activities, within the cash flow statement, to determine where a company is getting its money from. In contrast to investing and financing activities which may be one-time or sporadic revenue, the operating activities are core to the business and are recurring in nature.

Types of Cash Flow from Operating Activities

The cash flow from operating activities section can be displayed on the cash flow statement in one of two ways.

Indirect Method

The first option is the indirect method , where the company begins with net income on an accrual accounting basis and works backwards to achieve a cash basis figure for the period. Under the accrual method of accounting, revenue is recognized when earned, not necessarily when cash is received.

For example, if a customer buys a $500 widget on credit, the sale has been made but the cash has not yet been received. The revenue is still recognized by the company in the month of the sale, and it shows up in net income on its income statement.

Therefore, net income was overstated by this amount on a cash basis. The offset to the $500 of revenue would appear in the accounts receivable line item on the balance sheet. On the cash flow statement, there would need to be a reduction from net income in the amount of the $500 increase to accounts receivable due to this sale. It would be displayed on the cash flow statement as "Increase in Accounts Receivable -$500."

Direct Method

The second option is the direct method , in which a company records all transactions on a cash basis and displays the information on the cash flow statement using actual cash inflows and outflows during the accounting period .

Examples of the direct method of cash flows from operating activities include:

• Salaries paid out to employees
• Cash paid to vendors and suppliers
• Cash collected from customers
• Interest income and dividends received
• Income tax paid and interest paid

Indirect Method vs. Direct Method

Many accountants prefer the indirect method because it is simple to prepare the cash flow statement using information from the income statement and balance sheet. Most companies use the accrual method of accounting, so the income statement and balance sheet will have figures consistent with this method.

The  Financial Accounting Standards Board (FASB) recommends that companies use the direct method as it offers a clearer picture of cash flows in and out of a business. However, as an added complexity of the direct method, the FASB also requires a business using the direct method to disclose the reconciliation of net income to the cash flow from operating activities that would have been reported if the indirect method had been used to prepare the statement.

The reconciliation report is used to check the accuracy of the cash from operating activities, and it is similar to the indirect method. The reconciliation report begins by listing the net income and adjusting it for noncash transactions and changes in the balance sheet accounts. This added task makes the direct method unpopular among companies.

Indirect Method Formulas for Calculating Cash Flow from Operating Activities

Different reporting standards are followed by companies as well as the different reporting entities which may lead to different calculations under the indirect method. Depending upon the available figures, the CFO value can be calculated by one of the following formulas, as both yield the same result:

Cash Flow from Operating Activities = Funds from Operations + Changes in  Working Capital

where, Funds from Operations = (Net Income + Depreciation, Depletion, & Amortization + Deferred Taxes & Investment Tax Credit + Other Funds)

This format is used for reporting Cash Flow details by finance portals like MarketWatch.

Cash Flow from Operating Activities = Net Income + Depreciation, Depletion, & Amortization + Adjustments To Net Income + Changes In Accounts Receivables + Changes In Liabilities + Changes In Inventories + Changes In Other Operating Activities

This format is used for reporting Cash Flow details by finance portals like Yahoo! Finance.

All the above mentioned figures included above are available as standard line items in the cash flow statements of various companies.

The net income figure comes from the income statement. Since it is prepared on an accrual basis, the noncash expenses recorded on the income statement, such as depreciation and amortization, are added back to the net income. In addition, any changes in balance sheet accounts are also added to or subtracted from the net income to account for the overall cash flow.

Inventories, tax assets, accounts receivable , and accrued revenue are common items of assets for which a change in value will be reflected in cash flow from operating activities.  Accounts payable , tax liabilities, deferred revenue , and accrued expenses are common examples of liabilities for which a change in value is reflected in cash flow from operations.

From one reporting period to the next, any positive change in assets is backed out of the net income figure for cash flow calculations, while a positive change in liabilities is added back into net income for cash flow calculations. Essentially, an increase in an asset account, such as accounts receivable, means that revenue has been recorded that has not actually been received in cash. On the other hand, an increase in a liability account, such as accounts payable, means that an expense has been recorded for which cash has not yet been paid.

Example of Cash Flow from Operating Activities

Let’s look at the cash flow details of the leading technology company Apple Inc. ( AAPL ) for the fiscal year ended September 2018. The iPhone maker had a net income of $59.53 billion, Depreciation, Depletion, & Amortization of $10.9 billion, Deferred Taxes & Investment Tax Credit of -$32.59 billion, and Other Funds of $4.9 billion.

Following the first formula, the summation of these numbers brings the value for Fund from Operations as $42.74 billion. The net Change in Working Capital for the same period was $34.69 billion. Adding it to Fund from Operations gives the Cash Flow from Operating Activities for Apple as $77.43 billion.

For the second method, summing up the available values from Yahoo! Finance portal that reports Apple's FY 2018 Net Income $59.531 billion, Depreciation $10.903 billion, Adjustments To Net Income -$27.694 billion, Changes In Accounts Receivables -$5.322 billion, Changes In Liabilities 9.131 billion, Changes In Inventories $.828 billion, and Changes In Other Operating Activities $30.057 billion gives the net CFO value as $77.434 billion.

Both the methods yield the same value.

Special Considerations

One must note that working capital is an important component of cash flow from operations, and companies can manipulate working capital by delaying the bill payments to suppliers, accelerating the collection of bills from customers, and delaying the purchase of inventory. All these measures allow a company to retain cash. Companies also have the liberty to set their own capitalization thresholds, which allow them to set the dollar amount at which a purchase qualifies as a capital expenditure.

Investors should be aware of these considerations when comparing the cash flow of different companies. Due to such flexibility where managers are able to manipulate these figures to a certain extent, the cash flow from operations is more commonly used for reviewing a single company's performance over two reporting periods, rather than comparing one company to another, even if the two belong in the same industry.

U.S. Securities and Exchange Commission. " Beginners' Guide to Financial Statement ."

Internal Revenue Service. " Publication 538: Accounting Periods and Methods ," Page 10.

Financial Accounting Standards Board. " Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments ."

U.S. Securities and Exchange Commission. " Apple Inc. Form 10-K ," Page 42.

Yahoo Finance. " Apple Inc. (AAPL) ."

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Operating Cycle

The duration taken for a corporation to convert inventory purchases into cash revenues from a sale.

Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally. Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.

Previously, he was an Associate in the Power, Energy, and Infrastructure Investment Banking group at  Lazard in New  York where he completed numerous  M&A  transactions and advised corporate clients on a range of financial and strategic issues. Kevin began his career in  corporate finance roles at  Enbridge Inc. in Canada. During his time at Enbridge Kevin worked across the finance function gaining experience in treasury, corporate planning, and investor relations.

Kevin holds an  MBA  from Harvard Business School, a Bachelor of Commerce Degree from Queen's University and is a  CFA  Charterholder.

• What Is An Operating Cycle?

Understanding Operating Cycle

Importance of operating cycle.

• Net Operating Cycle (Cash Cycle) Vs. Operating Cycle

Factors Impacting Operating Cycle

Significance of operating cycle, applications operating cycle, examples of oc, what is an operating cycle.

The operating cycle (OC) specifies how long it takes for a corporation to convert inventory purchases into cash revenues from a sale. The cash OC, cash conversion cycle, or asset conversion cycle are other common names.

There are three components to the operational cycle: payment turnover days, inventory turnover days, and accounts receivable turnover days. These elements combine to give the total measurement of operational cycle days.

The operational cycle formula and analysis follow logically from these. To be more exact, payable turnover days measure how quickly a corporation can pay off its financial commitments to suppliers.

The next phase is inventory turnover, a ratio that shows how frequently a firm sells and replaces its inventory over time. This ratio is typically calculated by dividing total sales by total inventory.

However, you can also calculate the ratio by dividing the cost of products sold by the average inventory. 

The third phase is accounts receivable turnover days when the firm is evaluated on how quickly it can collect money for its sales. As previously stated, the operational cycle is complete when all of these processes are completed.

An OC is the number of days it takes for a company to receive inventory , sell goods, and earn cash from the sale of merchandise. This cycle is crucial in establishing a company's efficiency.

The OC formula is as follows:

Operating Cycle = Inventory Period + Accounts Receivable Period

 The inventory period is the time inventory remains in storage before being sold. The accounts receivable period is the time it takes to recover cash from inventory sales.

Therefore, the detailed formula is:

Example Calculation,

Calculating with the data provided above:

• Inventory Turnover: $8,000,000 / $3,000,000 = 2.67
• Inventory Period: 365 / 2.67 = 136.7
• Receivables Turnover: $10,000,000 / $1,750,000 = 5.71
• Accounts Receivable Period: 365 / 5.71 = 63.9

Operating Cycle = 136.7 + 63.9 = 181.38 = 200.6 ≈ 201 days

It provides information on a company's operational efficiency. A shorter cycle signifies a more efficient and effective firm.

A shorter cycle suggests that a corporation can swiftly recover its inventory investment and have adequate cash to satisfy its obligations. Conversely, a company's OC is too long might cause cash flow issues.

There are two methods for a firm to lower their OC:

Accelerate inventory selling: If a corporation can sell its goods rapidly, the OC should fall.

Reduce the time it takes to collect receivables: If a firm can collect credit sales more rapidly, the OC will fall.

Net Operating Cycle (Cash Cycle) vs. Operating Cycle

The net operating cycle (NOC) is sometimes mistaken for the operational cycle (OC) (NOC). The cash conversion cycle , often known as the cash cycle, illustrates how long it takes a corporation to collect cash from the sale of inventory. To distinguish between the two:

• OC: The period elapsing between the acquisition of inventory and the cash received from the sale of goods.
• NOC: The time it takes between paying for inventory and receiving cash from its sale.

Another formula for the NOC = 

Inventory Period + Accounts Receivable Period – Accounts Payable Period

The NOC computation differs from the first in subtracting the accounts payable period from the first because the NOC is only concerned with the time between purchasing items and getting payment from their sale.

The image below illustrates the difference between the cycles:

All of the following elements determine the length of the operational cycle:

• The company's suppliers extend payment arrangements to it. More extended payment periods reduce the operational cycle since the corporation may postpone cash payments.
• Because the projected beginning fulfillment rate is higher, the order fulfillment policy increases the quantity of inventory on hand, lengthening the operational cycle.
• Because looser credit means a longer period until clients pay, the credit policy and payment terms prolong the operational cycle.

As a result, various management actions (or negotiated problems with business partners) can influence a company's operational cycle. The cycle should ideally be kept as short as possible to lower the business's financial requirements.

Examining a potential acquirer's OC can be especially beneficial since it might show opportunities for the acquirer to change the OC to lower cash requirements, which may offset some or all of the financial expenditure required to buy the acquirer.

The operational cycle is significant because it may notify a business owner how soon goods can be sold. In addition, it determines the efficiency of the organization.

For example, if the company's operational cycle is short, it may quickly execute a turnaround. It may also imply shorter payment periods and a more stringent credit policy.

A shorter operational cycle is preferable since the firm has adequate cash to keep operations running, recoup investments, and satisfy other commitments. In contrast, a company with a longer OC will require more capital to keep operations running.

There are several factors in a company's OC, and an operational cycle may assist in identifying a company's financial status.

The better a business owner knows the company's OC, the better decisions that owner may make for the firm's benefit.

Suggestions For Reducing A Company's Operational Cycle

When aiming to reduce a company's OC, consider the following suggestions:

• Implement a more stringent credit policy: Customers are more likely to pay for their products on time if businesses enforce a rigorous credit policy.
• Reduce the payment terms' duration: The faster a corporation can recover accounts receivable, the shorter its OC.
• Sell inventory quickly: The faster a firm sells its goods, the shorter its OC should be.

The notion of the operational cycle reflects a company's genuine liquidity. Investors can determine a firm's investment quality by tracking its OC's historical record and comparing it to peer groups in the same industry.

A short corporate OC is advantageous since earnings are realized quickly. It also enables a corporation to obtain capital for reinvestment swiftly. On the other hand, a long business OC takes a long time for a corporation to convert purchases into cash through sales.

In general, the shorter a company's cycle, the better. This is because less capital is invested in the company process. The most straightforward method is to abbreviate each three-cycle portion by at least a tiny amount.

The collective effect of shortening these parts can considerably impact the total economic cycle. As a result, it may lead to a more profitable business.

A few of the examples are:

Assume Tom operates a store. His company's OC would begin when he buys various products from suppliers to sell to customers. The OC would not stop until all products were sold and payment was collected from clients.

Walmart Stores Inc. (NYSE: WMT) is obsessed with its inventory. Determine its operational cycle, assuming all sales are (a) cash and (b) credit sales.

You may use the cost of revenue as an estimate for purchases (i.e., no need to adjust it for changes in inventories).

• Step 1: Number of days spent converting inventory to accounts receivable = 365 / 352,488 * 42,259 = 43.75
• Step 2: Because no credit sales are made, the period to collect funds from accounts receivable is nil. Customers pay in cash on the spot.
• Step 3: The operational cycle is 43.75 days, representing the period spent primarily on inventory sales.

There is no change in the days required to convert inventory to accounts receivable.

Days have taken to convert receivables to cash

= 365 ÷ 469,162 × 6,353 = 4.92

Operating cycle = 

Days taken in selling (DIO) + Days taken in recovering cash (DSO)

43.75 + 4.92 = 48.68

It should be compared to Walmart's competitors' operating cycles, such as Amazon , Costco , and Target .

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• C All Exercises & Assignments

Write a C program to check whether a number is even or odd

Description:

Write a C program to check whether a number is even or odd.

Note: Even number is divided by 2 and give the remainder 0 but odd number is not divisible by 2 for eg. 4 is divisible by 2 and 9 is not divisible by 2.

Conditions:

• Create a variable with name of number.
• Take value from user for number variable.

Enter the Number=9 Number is Odd.

Write a C program to swap value of two variables using the third variable.

You need to create a C program to swap values of two variables using the third variable.

You can use a temp variable as a blank variable to swap the value of x and y.

• Take three variables for eg. x, y and temp.
• Swap the value of x and y variable.

Write a C program to check whether a user is eligible to vote or not.

You need to create a C program to check whether a user is eligible to vote or not.

• Minimum age required for voting is 18.
• You can use decision making statement.

Enter your age=28 User is eligible to vote

Write a C program to check whether an alphabet is Vowel or Consonant

You need to create a C program to check whether an alphabet is Vowel or Consonant.

• Create a character type variable with name of alphabet and take the value from the user.
• You can use conditional statements.

Enter an alphabet: O O is a vowel.

Write a C program to find the maximum number between three numbers

You need to write a C program to find the maximum number between three numbers.

• Create three variables in c with name of number1, number2 and number3
• Find out the maximum number using the nested if-else statement

Enter three numbers: 10 20 30 Number3 is max with value of 30

Write a C program to check whether number is positive, negative or zero

You need to write a C program to check whether number is positive, negative or zero

• Create variable with name of number and the value will taken by user or console
• Create this c program code using else if ladder statement

Enter a number : 10 10 is positive

Write a C program to calculate Electricity bill.

You need to write a C program to calculate electricity bill using if-else statements.

• For first 50 units – Rs. 3.50/unit
• For next 100 units – Rs. 4.00/unit
• For next 100 units – Rs. 5.20/unit
• For units above 250 – Rs. 6.50/unit
• You can use conditional statements.

Enter the units consumed=278.90 Electricity Bill=1282.84 Rupees

Write a C program to print 1 to 10 numbers using the while loop

You need to create a C program to print 1 to 10 numbers using the while loop

• Create a variable for the loop iteration
• Use increment operator in while loop

1 2 3 4 5 6 7 8 9 10

• C Exercises Categories
• C Top Exercises
• C Decision Making

Resources: Course Assignments

Module 14 assignment: performance evaluation in organizations.

This assignment is available for download as a  Word Document .

Read the following scenario and complete the questions and tasks below.

Information from Halloran Company’s Income Statement and Balance Sheets for the years 2013–2017 is presented.

• Use these statements to calculate trend percentages for all components of both statements using 2013 as the base year.
• Prepare a memo to the CEO of Halloran company summarizing your findings about the financial health of the company, using your calculations from above as evidence to support your conclusions.