Finding/Calculating Funds from Operations - Methods available

Net profit can be taken to be the funds from operations only when there are no transactions involving nominal accounts which represent losses, gains, appropriations and adjustments or if the net profit is a figure that is not affected by such transactions.

However, in most cases, the net profit is a figure that is affected at least by transactions involving nominal accounts that represent losses and gains.

In most cases, net profit is a figure arrived at after deducting depreciation. The transaction for recording depreciation, not being a cross transaction does not bring about a change in working capital (fund). If we have to take the figure of net profit as the funds from operations, then it should have been arrived at without its influence.

Therefore, we ascertain the funds from operations by making proper adjustments to the figure of net profit based on the transactions that should not have affected it, if it is to be considered as the funds from operations.

Such adjustment involves writing back the affect of transactions which represents losses, gains, appropriations and adjustments.

Methods for Calculating/Finding Funds From Operations