Cash Flow From Operations – Basic Formula
The cash flows statement in accounting is broken out into three major sections as follows:
1) Cash Flow from Operations
2) Cash Flow from Investing
3) Cash Flow from Financing
Of the three, cash flow from operations is the most prominent. It identifies if the company is making money from its regular ongoing purpose. In a pure cash only operation, the profit as reported on the income statement would also be cash flow from operations. But modern-day business is not pure in how it is conducted. Companies agree to pay suppliers at a later time, payroll is weekly or monthly, benefits that are paid in the future are offered to employees, credit is extended to customers; the list can go on and on.
Because of this complexity, the formula to determine cash flow from ongoing operations is also rather complex. This article breaks it down into three basic steps so the reader has an introduction to the basic formula. To successfully grasp the understanding of how cash flow works, this article explains two of the steps from their cash perspectives. One is from the perspective of current assets and the other is current liabilities. From there, all three steps are combined to determine cash flow from operations. The three steps consist of the following:
Step 1 – Adjust the profit for income statement items
Step 2 – Adjust for current asset changes
Step 3 – Adjust for current liability changes.
Finally, an in-depth example is illustrated for the reader.
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