Similarly, if the starting point profit is above interest and tax in the income statement, then interest and tax cash flows will need to be deducted if they are to be treated as operating cash flows. The items in the cash flow statement are not all actual cash flows, but “reasons why cash flow is different from profit.”ĭepreciation expense reduces profit but does not impact cash flow (it is a non-cash expense). Indirect Presentation: Operating cash flows are presented as a reconciliation from profit to cash flow:.This is a simple but rarely used method, as the indirect presentation is more common. Direct Presentation: Operating cash flows are presented as a list of cash flows cash in from sales, cash out for capital expenditures, etc.The company’s chief financial officer (CFO) chooses between the direct and indirect presentation of operating cash flow: Cash Flow from Operations typically includes the cash flows associated with sales, purchases, and other expenses.

Operating activities are the principal revenue-producing activities of the entity. Cash Flow DefinitionsĬash Flow: Inflows and outflows of cash and cash equivalents (learn more in CFI’s Ultimate Cash Flow Guide)Ĭash Balance: Cash on hand and demand deposits (cash balance on the balance sheet)Ĭash Equivalents: Cash equivalents include cash held as bank deposits, short-term investments, and any very easily cash-convertible assets – includes overdrafts and cash equivalents with short-term maturities (less than three months). Image from CFI’s Financial Analysis Fundamentals Course. Financing Activities: Any cash flows that result in changes in the size and composition of the contributed equity capital or borrowings of the entity (i.e., bonds, stock, dividends).Investing Activities: Any cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents.Operating Activities: The principal revenue-generating activities of an organization and other activities that are not investing or financing any cash flows from current assets and current liabilities.Three Sections of the Statement of Cash Flows:

Operating cashflow