In a general corporate finance sense, cash flow can be approximated as equal to which of the following?

Introduction / Context:
Cash flow is a key measure in corporate finance because it represents the amount of cash a company generates that can be used to pay debt, invest, or distribute to owners. While there are many precise definitions depending on context, a common approximate measure is operating income after taxes plus non cash charges such as depreciation. This question tests whether you understand why depreciation is added back when estimating cash flow.

Given Data / Assumptions:

• Operating income refers to earnings before interest and taxes from core operations.
• Taxes are paid in cash, reducing the amount of cash available.
• Depreciation is a non cash expense that reduces accounting profit but does not involve an immediate cash outflow.
• We are using a simplified, general sense definition of cash flow, not a detailed cash flow statement.

Concept / Approach:
In simple terms, cash flow from operations can be approximated as operating income after taxes plus depreciation (and sometimes other non cash charges). The logic is that depreciation reduces reported profit but does not require cash in the current period, because the cash outlay for the asset occurred when it was originally purchased. Therefore, to estimate how much cash operations are generating, we start with operating income, subtract taxes, and then add back depreciation as a non cash expense. This gives a rough measure of cash generated from operations.

Step-by-Step Solution:
Step 1: Start with operating income, which represents profit from core business activities before interest and taxes. Step 2: Recognise that taxes are paid in cash, so we must subtract the tax amount to reflect actual cash leaving the business. Step 3: Understand that depreciation is an accounting allocation of the original cost of fixed assets over their useful life; it does not involve a current cash payment. Step 4: Because depreciation reduced operating income without using cash, we add it back to arrive at an approximate cash flow figure. Step 5: Thus, a common approximation is: cash flow ≈ operating income less taxes plus depreciation.

Verification / Alternative check:
Consider a company with operating income of Rs 1,00,000, taxes of Rs 30,000, and depreciation of Rs 20,000. Reported profit after tax is Rs 70,000, but cash flow from operations is higher because depreciation did not consume cash this year. Using the approximation, cash flow is: Cash flow = 1,00,000 - 30,000 + 20,000 = Rs 90,000 This matches the intuitive idea that the company has Rs 90,000 of operating cash to service debt or invest, even though reported net income is only Rs 70,000.

Why Other Options Are Wrong:
Operating income less taxes only ignores depreciation, understating cash flow because it does not add back the non cash expense. Operating income after taxes minus depreciation subtracts depreciation twice, giving an unrealistically low cash flow. Operating income before depreciation and taxes plus depreciation again double counts various components and does not correctly reflect taxes or non cash charges.

Common Pitfalls:
Many learners confuse accounting profit with cash flow and forget to adjust for non cash items. Others mistakenly think that depreciation is a cash outflow every year. Understanding that depreciation simply allocates a past cash outlay over time is crucial. Another pitfall is using overly complex formulas in simple exam questions; in many cases, remembering "cash flow ≈ profit after tax + depreciation" is sufficient.

Final Answer:
In a general sense, cash flow can be said to equal operating income less taxes plus depreciation, treating depreciation as a non cash expense added back.