Skip to main content Skip to main content
Not investment advice. Educational reading. See Disclaimer.
L.9 · INTERMEDIATE · 2 MIN

The Cash Flow Statement: Follow the Actual Money

The indirect method of the cash flow statement starts with net income and adjusts for non-cash items and working capital changes. Over 95% of public companies use this method.

Quiz · 5 questions ↓

Step through

Start with Net Income. This is the accrual accounting number from the income statement.

Add back non-cash expenses: depreciation, amortization, stock-based compensation. These reduced net income but no cash actually left.

Adjust for working capital changes: receivables up = cash used, payables up = cash preserved, inventory up = cash used.

Result: Operating Cash Flow. The actual cash generated by the core business.

Try it

Look at AAPL's cash flow statement. Walk through the indirect method: net income + D&A + SBC adjustments + working capital changes = operating cash flow.

Key insight

If operating cash flow consistently trails net income, the company may be using aggressive accrual accounting to inflate earnings. Cash flow is the truth serum.

Check-in

Company reports Net Income of $300M. Cash Flow from Operations is $450M. Strong signal? Good business?
Check your understanding

Sit with the ideas.

Net Income is $100,000. Depreciation is $20,000. Accounts Receivable increased $15,000. Accounts Payable decreased $5,000. What is operating cash flow?

Why:
Continue this lesson in the appAdaptive practice · saves your progress · remediation when you miss

Other lessons in this course.

  1. 01Accrual vs Cash Accounting
  2. 02Depreciation: Spreading the Cost of Assets
  3. 03Stock-Based Compensation: The Hidden Cost
  4. 04Adjusting Entries: Why Period-End Matters
  5. 05Revenue Recognition: The ASC 606 Five-Step Model
  6. 06Bad Debts: When Customers Don't Pay
  7. 07Inventory: FIFO vs. LIFO and Why It Matters
  8. 08PP&E Deep Dive: Four Depreciation Methods and Asset Disposal
  9. 09The Cash Flow Statement: Follow the Actual Money— reading now
  10. 10DuPont Analysis: Decomposing Return on Equity
  11. 11EPS and Dilution: The Most Watched Number on Wall Street
  12. 12Deferred Taxes: Why Tax Expense Differs from Taxes Paid
  13. 13Lease Accounting: The Hidden Debt That Isn't So Hidden Anymore
Continue this lesson in the app →See it on a real ticker →