CASH FLOW STATEMENT: Direct vs Indirect, Operating vs Investing vs Financing
- Graziano Stefanelli
- May 30
- 2 min read
The cash flow statement shows how cash moves in and out of a business across operating, investing, and financing activities.
It helps assess liquidity, solvency, and the company’s ability to generate cash.
1. Purpose of the Cash Flow Statement
The cash flow statement explains the actual cash generated or used during a reporting period.
It complements the income statement (which uses accruals) by revealing the company’s real-time cash position.
2. Three Sections of the Cash Flow Statement
Section | Includes |
Operating Activities | Cash from daily business operations (receipts from customers, payments to suppliers) |
Investing Activities | Cash from buying or selling long-term assets (e.g., equipment, investments) |
Financing Activities | Cash from loans, owner investments, dividends, or debt repayments |
3. Operating Activities – Direct vs Indirect Method
Direct Method:
Reports actual cash receipts and payments
Cash received from customers
Cash paid to suppliers/employees
Interest paid, taxes paid
Indirect Method (most common):
Starts with net income and adjusts for:
Non-cash items (depreciation, amortization)
Changes in working capital (receivables, payables, inventory)
Indirect method example (partial):
Net income: $50,000
Depreciation: $5,000– Increase in AR: ($4,000)
Increase in AP: $2,000= Net cash from operations: $53,000
4. Investing Activities
Captures cash used for long-term growth.
Typical items:
Purchase/sale of property, plant & equipment
Proceeds from sale of investments
Loans made to others
Example:
Purchase equipment: (30,000)
Sell investment: +10,000
Net cash used: (20,000)
5. Financing Activities
Shows how the business is financed by equity and debt.
Includes:
Proceeds from issuing stock or bonds
Loan repayments
Dividends paid
Example:
Issue stock: +25,000
Repay loan: (15,000)
Dividends paid: (5,000)Net cash from financing: +5,000
6. Final Structure of the Statement
Section | Amount |
Net cash from operating | +53,000 |
Net cash used in investing | –20,000 |
Net cash from financing | +5,000 |
Net change in cash | +38,000 |
Cash at beginning of year | 10,000 |
Cash at end of year | 48,000 |
7. Common Adjustments (Indirect Method)
Adjustment | Add / Subtract |
Depreciation | Add |
Increase in AR | Subtract |
Decrease in inventory | Add |
Increase in AP | Add |
Gain on asset sale | Subtract |
8. Disclosures
Companies must disclose:
Non-cash investing and financing (e.g., leases, stock-for-assets deals)
Interest and taxes paid (under direct method)
Significant policy choices for classification
Key take-aways
The cash flow statement shows how cash moves through operations, investments, and financing.
The indirect method is more common and starts with net income.
Understanding cash flow helps assess a company’s financial health beyond accounting profits.
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