Operating Expns Vs Non-Operating Expns

Dear Ramu,

A very good query raised by you.

You have mentioned the formula for calculating operating profit correctly. Depreciation on P&M is an operating expense because P & M helps in day to day production(operation) of business. Moreover, remember one thing that it is a non cash operating expense. It is taken in calculation of operating profit.

Coming  to your second question, Funds from operation(FFO) and Operating profit are two different things. FFO is the result of operating activities and its calculated by excluding non-cash operating exp. These items are merely book entries. In operating profit you consider both cash and non-cash operating items.

To be more clear. FFO does not include any items which is non- cash and non-operating. FFO purely analyses flow of your funds in working capital cycle and that is why non-cash items( like depreciation) do not form part of it.

We can say, FFO = N/P + Dep. + Non operating Exp. - Non operating Incomes

Hi Ramu.

Operating exps are those which we made on daily basis for running the business.Depreciation on P&M is a part of operating exps. because when we use machinery or any other assets its value get reduced but we can not calculate it on daily basis so we use the term of depreciation and calculate it on year end basis. It is a non cash item so we will take it only for calculatinf operating profit not in the calculation of funds generated from business operation as it includes only cash movement because we want to know how much we earned or lost in form of cash.

byeeeeeeeeee