# How to Calculate Cash Flow From Operating Activities

The indirect method adjusts accrual-based revenues and expenses to cash.

A company reports its cash flow from operating activities, which is the cash it generates from its core operations, on its cash flow statement. Cash from operating activities is often a better measure of a company's performance than net income, or earnings, because net income can be distorted by accrual-based accounting and non-cash items such as depreciation expense. You can measure cash flow from operations using the indirect method, which adjusts a company's net income for non-cash items, items that aren't part of its core operations and changes in certain balance sheet items. This adjustment provides a result that shows only the cash that's generated from its daily operations.

## Step 1

Determine the amount of a company's net income and depreciation expense from its most recent income statement.

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## Step 2

Determine the amount of any gains or losses on the income statement. These items are not part of a company's normal operations and must be removed from net income. Gains and losses include items such as gain from a sale of equipment and are listed in a section called "non-operating gains/losses" or "other income/loss."

## Step 3

Find the amount of each item in the "current assets" and "current liabilities" sections of a company's most recent balance sheet and the prior accounting period's balance sheet. Current assets include items such as accounts receivable and inventory, and current liabilities include items such as accounts payable and wages payable.

## Step 4

Subtract each amount in the prior period from the amount in the most recent period to determine the amount of increase or decrease. A positive result is an increase and a negative result is a decrease. For example, subtract \$10,000 in accounts receivable in the prior period from \$12,000 in the most recent period. This equals an increase of \$2,000.

## Step 5

Add depreciation expense and losses to, and subtract gains from, net income. For example, add \$100,000 in depreciation expense and \$50,000 in losses to, and subtract \$60,000 in gains from, \$700,000 in net income: \$700,000 plus \$100,000 plus \$50,000 minus \$60,000 equals \$790,000.

## Step 6

Subtract from your result any increases in current assets and add any decreases in current assets except for cash. For example, subtract a \$20,000 increase in inventory and add a \$50,000 decrease in accounts receivable: \$790,000 minus \$20,000 plus \$50,000 equals \$820,000.

## Step 7

Add to your result any increases in current liabilities, and subtract any decreases in current liabilities. For example, add a \$100,000 increase in accounts payable and subtract a \$10,000 decrease in wages payable: \$820,000 plus \$100,000 minus \$10,000 equals \$910,000. This is the total cash flow from operating activities in the most recent accounting period.

#### Warning

Exclude notes receivable and notes payable from your findings and calculations. These amounts are part of cash from investing and financing activities.

#### Things You'll Need

• Company’s most recent income statement

• Company’s two most recent balance sheets