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Preparing cash flow from operating activities is one parts of preparing the cash flow statement. Here introduce the detailed calculation and the meaning of specific items about cash flow from operating activities.
The section of the statement begins with the profit before tax as shown in the income statement. The remaining figures are the adjustments necessary to convert the profit figure to the cash flow for the period.
- Depreciation: Added back to profit because it’s a non-cash expense
- Interest expense: Added back because it’s not part of cash generated from operations (the interest actually paid is not belong to operating activities)
- Increase in trade receivables: Deducted because this is part of the profit not yet realised into cash but tied up in receivables
- Decrease in inventories: Added on because the decrease in inventories liberates extra cash
- Decrease in trade payables: Deducted because the reduction in payables must reduce cash
- Interest paid, dividends paid, income taxes paid: These are the amounts actually paid in the year.
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