![]() ![]() Since we are trying to estimate the effect of only cash-based entries, this can be achieved by simply eliminating the non-cash-based items. It is based on the idea that entries in the Profit & loss statement and the Balance sheet can be segregated into cash-based and non-cash-based items. The indirect method, on the other hand, works very differently. A simplistic illustration of the cash flow from operations of a hypothetical company, which sells milk, created using the direct method would be as given: The direct method, arguably the more intuitive way of recording cash flows, simply lists all inflows and outflows that have occurred in a company's operations. The cash flow from operations can be prepared in two ways: the Direct method and the Indirect method. How is cash flow from operations prepared? Since the cash flow from operations restricts itself to operating activities, it would not, for most companies, record any cash flows arising out of ancillary activities such as receiving interest from a fixed deposit (FD), distributing dividends to shareholders, etc. Some examples of transactions involving cash flows from operating activities are:ġ.Ĝash receipts from the sale of goods and servicesĢ.Ĝash payments to suppliers of goods and servicesģ.Ĝash payments to and on behalf of employees In other words, this statement gives investors information about the amount of cash generated (or lost) from its core business, i.e., selling goods/services to customers. ![]() The cash flow from operations (CFO), as the name suggests, records the quantum of cash inflows and outflows that can be attributed to the regular business activities of a company. Out of the three sub-components of the cash flow statement - cash flow from operations, cash flow from investing, cash flow from financing, let's focus on the first. Since we know the broad structure of the cash flow statement, it is time to dive into each of its individual components. As readers are now aware, reading the cash flow statement is critical in understanding the cash-generating ability of a company.
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