How to calculate cash flow

Cash flow is reported in the statement of cash flows. It is calculated for three separate classifications within the statement, which are:

  • Operating activities. These are an entity’s primary revenue-producing activities. Operating activities is the default classification, so if a cash flow does not belong in either of the following two classifications, it belongs in this classification. Operating cash flows are generally associated with revenues and expenses.
  • Investing activities. These are investments in productive assets, as well as in the debt and equity securities issued by other entities. These cash flows are generally associated with the purchase or sale of assets.
  • Financing activities. These are the activities resulting in alterations to the amount of contributed equity and an entity’s borrowings. These cash flows are generally associated with liabilities or equity, and involve transactions between the reporting entity and its providers of capital.

The calculation of cash flow for operating activities is usually compiled using the indirect method of presentation. This presentation begins with net income or loss, with subsequent additions to or deductions from that amount for non-cash revenue and expense items, resulting in cash provided by operating activities. Adjustments to the net income figure that are needed to derive cash flows from operating activities include:

  • Accrued revenue
  • Accrued expenses, such as a provision for bad debt losses
  • Noncash expenses, such as depreciation, amortization, and depletion
  • Gains and losses from the sale of assets
  • Change in accounts receivable
  • Change in inventory
  • Change in accounts payable

The calculation of cash flow for investing activities includes the following items:

  • Cash outflows and cash inflows for investment purchases and sales
  • Cash outflows and cash inflows for fixed asset purchases and sales
  • Cash outflows and cash inflows for business entity purchases and sales

The calculation of cash flow for financing activities includes the following items:

  • Cash inflows from the sale of stock
  • Cash inflows from the issuance of debt instruments
  • Cash outflows from the repurchase of stock
  • Cash outflows for the repayment of debt
  • Cash outflows for the payment of dividends

Cash flow information is needed for a number of analyses, such as the computation of cash flow per share and the cash flow return on sales.