There are two ways to prepare a cash flow statement: the direct method and the indirect method:
Direct method – Operating cash flows are presented as a list of ingoing and outgoing cash flows. Essentially, the direct method subtracts the money you spend from the money you receive.
Indirect method – The indirect method presents operating cash flows as a reconciliation from profit to cash flow. This means that depreciation is factored into your calculations.
Activity and its example
Operating activities – This refers to regular business activities. Inflows include revenue from selling products or services, dividends received by the business, interest, and other cash receipts, Outflows include payroll, overheads, taxes, and payments to suppliers and vendors.
Investing activities – This refers to gains and losses from investments. Inflows include sales from business assets and payments from loans made by your business, Outflows include purchases of assets and loans made by your business.
Financial activities – This refers to capital that’s raised externally. Inflows include any money that’s been borrowed, as well as sales of your company’s securities. Outflows include dividend payments and servicing debt.
