Objectives

Section Learning Objectives

4.1

The Indirect Method Cash Flow Statement

📖Key Concept

The Cash Flow Statement is derived entirely from the IS and BS — it contains no new information. It starts with Net Income (IS), adjusts for non-cash items, incorporates BS changes, and arrives at the change in cash. The ending cash flows back to the BS.

📊 Three Sections of the Cash Flow Statement

Operating CF

Cash from core business operations

= Net Income
+ Depreciation
+ Δ Working Capital
Investing CF

Cash from buying/selling assets

= − CapEx
+ Asset Sales
+ Investment sales
Financing CF

Cash from debt and equity

= Debt Borrowed
− Debt Repaid
− Dividends
4.2

Operating Cash Flow

✅ Cash from Operations (CFO)

The most important section — shows cash generated by the core business.

Operating CF = Net Income + Non-Cash Adjustments + Working Capital Changes

Step 1: Start with Net Income (from IS)
Step 2: Add back Depreciation & Amortization (non-cash expense)
Step 3: Add/subtract Working Capital Changes
  • −ΔAR (increase in AR = less cash collected)
  • −ΔInventory (increase in inventory = cash consumed)
  • +ΔAP (increase in AP = delayed payment = cash saved)
💡Excel Implementation

=Net_Income + Depreciation + (Prior_AR - Current_AR) + (Prior_Inv - Current_Inv) + (Current_AP - Prior_AP)

Shortcut for NWC: =Net_Income + Depreciation - Change_in_NWC
(where Change_in_NWC = Current NWC − Prior NWC)

4.3

Investing Cash Flow

🏗️ Cash from Investing (CFI)

Shows cash spent on long-term assets (or received from selling them).

Investing CF = −Capital Expenditures + Proceeds from Asset Sales

• CapEx is typically the largest outflow (negative number)
• Asset sales are occasional inflows
• In simple models: Investing CF = −CapEx
• This links to the BS: CapEx increases PP&E
⚠️Important Note

CapEx appears in two places: as a negative number in Investing CF, and as an addition to PP&E on the BS. Don't confuse CapEx (cash outflow) with Depreciation (non-cash expense). CapEx = buying the asset; Depreciation = spreading the cost over time.

4.4

Financing Cash Flow

💳 Cash from Financing (CFF)

Shows cash flows related to how the company is funded — debt and equity.

Financing CF = Debt Proceeds − Debt Repayments − Dividends

• Debt Proceeds (borrowings) = cash inflow
• Debt Repayments (principal) = cash outflow
• Dividends = cash outflow to shareholders
• Stock Issuance/Repurchase = inflow/outflow

Key distinction:
• INTEREST → already in Net Income (Operating section)
• PRINCIPAL → shown here in Financing section
4.5

Complete Cash Flow Statement Example

📊 Full Cash Flow Build — Nexus Corp (Year 1)

Line Item Source Amount
Operating Activities
  Net Income IS $75.0M
  + Depreciation & Amortization IS/BS $25.0M
  − Increase in AR BS ($10.0M)
  + Decrease in Inventory BS $5.0M
  + Increase in AP BS $10.0M
Cash from Operations $105.0M
Investing Activities
  − Capital Expenditures BS ($50.0M)
Cash from Investing ($50.0M)
Financing Activities
  + Debt Borrowings Debt Sch. $15.0M
  − Debt Repayments Debt Sch. ($20.0M)
  − Dividends Paid Assumption ($15.0M)
Cash from Financing ($20.0M)
Net Change in Cash
Total Cash Flow $35.0M
  Beginning Cash BS (prior) $50.0M
Ending Cash Balance → BS $85.0M
💡Key Observation

The Ending Cash of $85M flows back to the Balance Sheet as the cash & equivalents line item. This is the final link that closes the loop: IS → BS → CF → BS. When done correctly, the Balance Sheet will balance: Assets (including $85M cash) = Liabilities + Equity.

Practice

Hands-on Exercise: Build the Cash Flow Statement (Indirect)

Use the dataset to construct the Cash Flow Statement using the indirect method. Condensed instructions are below; the full step‑by‑step solution is hidden and can be revealed with the Show / Hide Solution Steps button.

Download CF Construction CSV Download Full Guide (includes solutions)

  1. Open the CSV and identify Net Income, Depreciation, ΔAR, ΔInventory, ΔAP, CapEx, Borrowings, Repayments, Dividends and Beginning Cash.
  2. Compute Operating CF = Net Income + Depreciation − ΔAR − ΔInventory + ΔAP.
  3. Compute Investing CF = −CapEx (and any asset sales if present).
  4. Compute Financing CF = Borrowings − Repayments − Dividends.
  5. Sum to Total CF and compute Ending Cash = Beginning Cash + Total CF. Verify Ending Cash ties back to the Balance Sheet.
Summary

Key Takeaways

  • Operating CF = Net Income + D&A + Working Capital Changes
  • Investing CF = −CapEx + Asset Sales (links to PP&E on BS)
  • Financing CF = Debt flows − Dividends (principal only, not interest)
  • Ending Cash = Beginning Cash + Total CF → flows back to BS
  • CF is derived — it contains no new information, only IS + BS changes
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