How to calculate cash flow from operating activities

Cash flow from company’s operating activities shows the investors the amount of money a company brings in during the normal course of business.

Operating activities are the most complex of the three sources shown in a statement of cash flow. This statement is prepared by taking the company’s net profit shown in income statement and then a number of additions and subtractions are done in order to find out company’s change in cash flow.

You can obtain income statement for a year or quarter from company’s published annual report. It’s a statement which shows how the company has performed financially during a particular period and How much money came in and what costs are incurred?

Here are the most important adjustments made to company’s net earning in order to find out company’s cash flow from operation.

Depreciation

Depreciation is charged to profit and loss account due to the wear and tear of the equipment used in normal business operation. Even though its charged to income statement as a expense, cash outflow is nil.

You can find total depreciation calculation in notes to accounts section of the company. However, depreciation charged for the current year can be seen in company’s income statements.

Depreciation is one of the most important adjustment done to net profit in order to find out cash flow from operations. You need to add depreciation as it has been deducted in the computation of net income but does not require any payment from the company.

Changes in Current assets and Current liabilities

To find out cash flow from operating activities, we need to adjust net income for changes in current assets and current liabilities as it represents the adjustments of accrual accounting.

For instance, if accounts receivable is decreased by Rs 1,00,000, it means Rs 1,00,000 collected from customers by the business, so the decrease in receivable must be added to the net income to find out cash flow from operation.

Similarly, if inventory has gone up by Rs 1,00,000, it means money has been invested and it must be deducted out of the net income to find out exact cash from operation.

Table below shows adjustment of net income for changes in working capital accounts to get you cash flow from operations:

Change in Working Capital AccountAdjustment to Net income
Increase in current assetsDeduct the changes
Decrease in current assetsAdd the changes
Increase the current liabilitiesAdd the changes
Decrease the current liabilitiesDeduct the changes

Here is a normal format to calculate cash flow from operating activities;

Current yearLast year
Net IncomeXXXXXX
Add or Deduct adjustments
Changes accounts receivablesXXXX
Changes in accounts payableXXXX
Changes in marketable securitiesXXXX
Changes in inventoriesXXXX
Changes in other current liabilitiesXXXX
DepreciationXXXX
Cash flow from operating activities (CFO)XXXXXX

If the total cash flow of the operating activities is positive, then the activity brought money into the company.

Investing and Financing are the other two activities to analyze from the investing point of view. You will know how money has moved in and out of the company for investing and funding activities.