A cash flow statement reports on the cash used or generated under three sections: operating activities, investing activities and financing activities. The cash from operating activities, also known as net cash inflow, is the net income plus changes in current assets and liabilities, adjustments for depreciation and amortization expenses and fixed asset dispositions. The investing section reports on changes in fixed assets. The financing section reports on changes in long-term liabilities and shareholders’ equity.
Get the net income for the period from the income statement. A period could be a month, quarter or a year. Assume a net income of $100 for the period.
Calculate the total depreciation and amortization expenses from the income statement. These non-cash items must be added back to net income. Assume $5 for these expenses in the period.
Calculate the adjustments for disposal of fixed assets. Fixed assets are carried at book value on the balance sheet. The book value is equal to the purchase price minus the accumulated depreciation. When one of these assets is sold for more or less than its book value, a gain or loss is recorded on the income statement as “gain/loss from sale of assets.” Assume there were no such dispositions in the period.
Calculate the changes in the current assets accounts on the balance sheet, such as accounts receivable and inventory, from the prior to the current period. Remember that when current assets increase in value, it is an use of cash; otherwise, it is a source or generator of cash. For example, if there were $25 worth of additions to the inventory in the period, the change in cash is a negative $25.
Calculate the changes in the current liabilities accounts on the balance sheet, such as accounts payable, salaries payable, interest payable, taxes payable and short-term loans payable, from the prior to the current period. When a liability account increases in value, it is a source of cash; otherwise, it is an use of cash. For example, if there were $10 and $5 increases in the interest payable and taxes payable accounts, respectively, and a $5 decrease in the short-term loans payable account, the change in cash is $10.
Calculate the net cash inflow by adding the net income to the changes in current assets and current liabilities accounts, adjustments for depreciation and amortization expenses, and fixed asset dispositions. To conclude the example, the net cash inflow for the period is equal to $100 plus $5 minus $25 plus $10, or $90.
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.