I cant seem to quite understand why CFO = NI +NCC - WC inv, can someone explain this from intuitive sense to me?
It’s the indirect method of CFO that you learned at Level I.
You start with net income, then remove everything that isn’t cash (noncash charges, and changes in net working capital) and everything that isn’t operations (gains/losses).
The formula here assumes that there are no gains/losses on the income statement.
Because Non cash charges are not cash outflows, but they are taken away from NI, so you add them back. Working Capital Investments are cash outflows but not taken out of NI, so minus from NI.
Shortly. Try to understand that accounting earnings (NI) are not based on cash flow only due to accrual accounting and expense/revenues recognition timing while FCFF and FCFE calculation are based only on pure cash flows so you have to adjust accounting data to get CF. It is referred to inflow side (NCC) as well as outflow side (WCinv/FcInv)
Consider this income statement
Sales 100 COGS 50 Gross profit 50 Depreciation 20 Net income 30
Imagine your sales were 80% cash but your COGS were 100% cash (so you paid $50 and received $80). In the bank now you have $30. The remaining 20% of sales are still owed. This is shown in balance sheet as 20 receivables (WC). So your WC increased by 20.
CFO indirectly tries to derive the bank balance by applying the broad formula
NI+NCC-WC=30+20-20=30
Also imagine your COGS were 60% cash. This means you paid only 50*60%=30 and now you have 50 in the bank (80-30) and you still owe 20 to your creditors. This is shown as payables, which is also WC. So your net WC is +20-20=0
Apply the formula again
30+20 -(+20-20)=50, just like in your bank…