As a result, the amount of the company’s long-term liabilities increased, as did its cash balance. Therefore, this inflow of $200,000 is reported as a positive amount in the financing activities section of the SCF. The proceeds (cash received) from the sale of long-term investments are reported as positive amounts since the proceeds are favorable for the company’s cash balance. Identify whether each of the following items would appear in the operating, investing, or financing activities section of the statement of cash flows. Expenses generated from key operating activities include manufacturing costs, as well as the expenses of advertising and marketing the company’s products or services. Manufacturing costs include all the direct production costs included in cost of goods sold (COGS).

  1. The cash flow statement is one of the three main financial statements required in standard financial reporting- in addition to the income statement and balance sheet.
  2. This corresponds to an increase in accounts payable liability on the balance sheet, which indicates a net increase in expenses charged to Apple that were not yet paid.
  3. As a result, the amount will be shown in the financing section of the SCF as (110,000).
  4. Other examples are cash payments for taxes, refunds paid to customers, and contributions.
  5. Cash from operating activities usually refers to the first section of the statement of cash flows.

The revenue is still recognized by the company in the month of the sale, and it shows up in net income on its income statement. The three net cash amounts from the operating, investing, and financing activities are combined into the amount often described as net increase (or decrease) in cash during the year. If an adjustment to the amount of net income is in parentheses, it is subtracted from net income. It indicates that the cash amount was less than the related amount on the income statement. Adjustments in parentheses can also be interpreted to be unfavorable for the company’s cash balance. When the equipment is placed into service, the company will begin to report depreciation expense on the profit and loss statements during the years that the equipment is used.

When a medium other than cash is used to acquire an asset we call it a non-cash investing activity. For example, a company can purchase a piece of equipment for $1,000 by making payment in cash which is a cash transaction or it can purchase a tract of land by issuing shares to the vendor which is a non-cash transaction. When we prepare a statement of cash flows, we are concerned only with cash transactions. The significant non-cash investing activities are, however, disclosed in the foot notes under the caption ‘non-cash investing and financing activities’.

Operating income is calculated by subtracting the cost of sales (COGS), research and development (R&D) expenses selling and marketing expenses, general and administrative expenses, and depreciation and amortization expenses. From one reporting period to the next, any positive change in assets is backed out of the net income figure for cash flow calculations, while a positive change in liabilities is added back into net income for cash flow calculations. Essentially, an increase in an asset account, such as accounts receivable, means that revenue has been recorded that has not actually been received in cash. On the other hand, an increase in a liability account, such as accounts payable, means that an expense has been recorded for which cash has not yet been paid. Investors want to see positive cash flow because of positive income from operating activities, which are recurring, not because the company is selling off all its assets, which results in one-time gains. The company’s balance sheet and income statement help round out the picture of its financial health.

Understanding Cash Flow From Operating Activities (CFO)

The patent is to be amortized over its economic useful life of 5 years using a straight line method. On 31st December, 2023 the company’s income statement showed a net operating income of $350,000. Under the indirect method, the SCF section cash flows from operating activities begins with the amount of net income, which is taken from the company’s income statement. Since the net income was based on the accrual method of accounting, the amount of net income must be adjusted to the cash amount. The offset to the $500 of revenue would appear in the accounts receivable line item on the balance sheet. On the cash flow statement, there would need to be a reduction from net income in the amount of the $500 increase to accounts receivable due to this sale.


The indirect method begins with the company’s net income based on the accrual method. That amount is then converted to the cash from operating activities by adding back depreciation expense and adjusting for the changes in accounts receivable, inventory, accounts payable, and most other current assets and current liabilities. Investors examine a company’s cash flow from operating activities, within the cash flow statement, to determine where a company is getting its money from.

Types of Cash Flow from Operating Activities

Examples of such assets include plant and machinery, equipment, tools, building, vehicles, furniture and land etc. Cash flows from financing activities are cash transactions related to the business raising money from debt or stock, or repaying that debt. Cash flows related to changes in equity can be identified on the Statement of Stockholder’s Equity, and cash flows related to long-term liabilities can be identified by changes in long-term liabilities on the balance sheet. Assume you are the chief financial officer of T-Shirt Pros, a small business that makes custom-printed T-shirts. While reviewing the financial statements that were prepared by company accountants, you discover an error.

Operating costs related to advertising and marketing include the expenses of advertising the company and its products or services using various media outlets, whether through traditional or online platforms. In addition, marketing costs include such things as intuit quickbooks payments appearing at trade shows and participating in public events such as charity fundraisers. For example, a spa business, in addition to providing services such as massages, may also seek additional revenue income from the sale of health and beauty products.

The holder of such instruments is generally entitled to receive a periodic interest income at some specified rate. Equity instruments (also known as equity securities) are the stocks of other companies that entitle the holder to receive a dividend income. Cash flows from investing activities are cash business transactions related to a business’ investments in long-term assets. They can usually be identified from changes in the Fixed Assets section of the long-term assets section of the balance sheet. Some examples of investing cash flows are payments for the purchase of land, buildings, equipment, and other investment assets and cash receipts from the sale of land, buildings, equipment, and other investment assets.

Understanding cash and non-cash investing activities:

Discover what a cash flow statement is and see the indirect method statement of cash flows, net cash flows, and other examples. Companies also have the liberty to set their own capitalization thresholds, which allow them to set the dollar amount at which a purchase qualifies as a capital expenditure. The cash flow from operating activities section can be displayed on the cash flow statement in one of two ways. Accounts payable, tax liabilities, and accrued expenses are common examples of liabilities for which a change in value is reflected in cash flow from operations.

In contrast to investing and financing activities which may be one-time or sporadic revenue, the operating activities are core to the business and are recurring in nature. While preparing statement of cash flows, the treatment of amortization of intangible assets is similar to depreciation on fixed assets. It is a non-cash expense and is added back to the net income in operating activities section if company uses indirect method to prepare its statement of cash flows. Like depreciation, amortization has nothing to do with investing activities section. A positive change in assets from one period to the next is recorded as a cash outflow, while a positive change in liabilities is recorded as a cash inflow.

The cash flow statement is one of the three main financial statements required in standard financial reporting- in addition to the income statement and balance sheet. The cash flow statement is divided into three sections—cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. Collectively, all three sections provide a picture of where the company’s cash comes from, how it is spent, and the net change in cash resulting from the firm’s activities during a given accounting period. Operating activities are the functions of a business directly related to providing its goods and/or services to the market. These are the company’s core business activities, such as manufacturing, distributing, marketing, and selling a product or service. Operating activities will generally provide the majority of a company’s cash flow and largely determine whether it is profitable.

Under the accrual method of accounting, revenue is recognized when earned, not necessarily when cash is received. Cash availability allows a business the option to expand, build and launch new products, buy back shares to affirm their strong financial position, pay out dividends to reward and bolster shareholder confidence, or reduce debt to save on interest payments. Investors attempt to look for companies whose share prices are lower and cash flow from operations is showing an upward trend over recent quarters. The disparity indicates that the company has increasing levels of cash flow which, if better utilized, can lead to higher share prices in near future. Cash flow from operating activities is also called cash flow from operations or operating cash flow. When its outflows are higher than its inflows, the company’s cash flows are negative.

Many accountants prefer the indirect method because it is simple to prepare the cash flow statement using information from the income statement and balance sheet. Most companies use the accrual method of accounting, so the income statement and balance sheet will have figures consistent with this method. The other two classifications used in the statement of cash flows are investing activities and financing activities. The operating activities classification is the default classification, so if a cash flow does not belong in either of the other classifications, it is placed in operating activities.

A business might also make cash payments to settle asset retirement obligations, or to pay interest to creditors. Just remember that principle activities include any cash inflows or outflows that relate to the primary business activity or the activity that business performs to earn a profit. Positive (and increasing) cash flow from operating activities indicates that the core business activities of the company are thriving. It provides as additional measure/indicator of profitability potential of a company, in addition to the traditional ones like net income or EBITDA. Net income is typically the first line item in the operating activities section of the cash flow statement. This value, which measures a business’s profitability, is derived directly from the net income shown in the company’s income statement for the corresponding period.

Companies may choose to use either the direct method or the indirect method when preparing the SCF section cash flows from operating activities. However, the indirect method is the dominant method used and the one we will explain. The key operating activities that produce revenues for a company are manufacturing and selling its products or services. Sales activities can include selling the company’s own in-house manufactured products or products supplied by other companies, as in the case of retailers. All the above mentioned figures included above are available as standard line items in the cash flow statements of various companies.

The interest earned on loans and advances are just like interest earned on normal investments and is reported in the statement of cash flows as described above. The IFRS, however, requires such cash flows be reported on consistent basis from period to period. Cash from operating activities usually refers to the first section of the statement of cash flows. Cash from operating activities focuses on the cash inflows and outflows from a company’s main business activities of buying and selling merchandise, providing services, etc.