Which components are included in cash flow from operations?

Master Glencoe Entrepreneurship Finance Exam. Enhance your skills with detailed questions and comprehensive explanations. Prepare with confidence for success!

Multiple Choice

Which components are included in cash flow from operations?

Cash flow from operations shows the cash generated by the day-to-day running of the business. When using the indirect method, you start with net income and adjust for items that affected reported income but didn’t involve cash, plus changes in working capital that affect cash receipts and payments. Net income is the starting point, and non-cash expenses such as depreciation are added back because they reduce net income without using cash in the period. Then you adjust for changes in working capital—things like accounts receivable, inventories, and accounts payable. An increase in current assets (for example, more money tied up in receivables or inventory) uses cash and lowers operating cash flow, while an increase in current liabilities (like higher payables) provides cash and raises operating cash flow. That combination—net income plus non-cash expenses and changes in working capital—captures the cash generated by core operations. The other activities, such as buying equipment or issuing debt, belong to investing or financing activities, not operating activities.

Cash flow from operations shows the cash generated by the day-to-day running of the business. When using the indirect method, you start with net income and adjust for items that affected reported income but didn’t involve cash, plus changes in working capital that affect cash receipts and payments.

Net income is the starting point, and non-cash expenses such as depreciation are added back because they reduce net income without using cash in the period. Then you adjust for changes in working capital—things like accounts receivable, inventories, and accounts payable. An increase in current assets (for example, more money tied up in receivables or inventory) uses cash and lowers operating cash flow, while an increase in current liabilities (like higher payables) provides cash and raises operating cash flow.

That combination—net income plus non-cash expenses and changes in working capital—captures the cash generated by core operations. The other activities, such as buying equipment or issuing debt, belong to investing or financing activities, not operating activities.

More practice questions