Statement of Cash Flows

Classification (US Generally Accepted Accounting Principles)

• Operating: customers, suppliers, employees, taxes, interest paid and received, dividends received, trading securities bought for resale, operating lease payments.
• Investing: buy/sell property, plant, and equipment and non-trading investments, loans made and collected, business acquisitions, insurance proceeds for property damage.
• Financing: issue/buy back stock, borrow/repay principal, dividends paid, finance lease principal, debt extinguishment costs.
• Noncash (disclose only): stock issued for assets, debt converted to stock, new right-of-use assets.

Indirect method

• Start with net income; add back depreciation, amortization, impairment, and losses; subtract gains.
• Bond discount amortization → add; bond premium amortization → subtract.
• Current operating assets: increase → subtract. Current operating liabilities: increase → add.
• Equity-method income above dividends received → subtract.

Direct method conversions

• Customers: Sales − ↑ accounts receivable
• Suppliers: Cost of goods sold + ↑ inventory − ↑ accounts payable
• Direct method requires a reconciliation (indirect) disclosure.

Must remember

• Cash equivalents: original maturity ≤ 3 months.
• Restricted cash is included in the totals.
• Disclose interest paid and income taxes paid.

Exam traps

• Equipment bought with seller financing: the financed part isn't an investing outflow (disclose it as noncash); later principal payments are financing.
• Gain on selling equipment: subtract it in operating activities and show the full proceeds in investing.
• Income taxes paid are operating, even when the tax relates to an investing gain.
• Only operating current assets and liabilities adjust net income — not dividends payable or short-term borrowings.