Cash flows from operating activities are cash inflows and outflows of cash related to a firm's "operating" activities. Operating activities are the same as those that would be reflected in operating income. 

Examples of inflows and outflows.

• 1. Inflows: Sales of goods and services; interest and dividends from investments.

  2. Outflows: purchase of inventory; salaries, wages, and other operating expenses; interest on debt; income taxes.

Two methods for calculating cash flows from operating activities

• 1. Direct method: The example above uses the direct method. Under the direct method, the cash effect of each operating activity is reported directly in the statement of cash flows.

  2. Indirect method: Under the indirect method, cash flows from operating activities is derived indirectly by starting with net income and adding or subtracting items to convert that amount to a cash basis. Example below.

Cash flows from investing activities represent cash inflows and outflows from the acquisition and sale of (a) long-term assets used in the business, and (b) non-operating investment assets.

Cash flows from financing activities represent cash inflows and outflows from transactions with creditors (except for transactions with suppliers) and owners.

Non-cash investing and financing activities

If a company executes a non-cash investing or financing transaction, the cash flow statement will not capture the transaction. But, if the transaction is material it needs to be disclosed to financial statement users.

How does the choice to use the direct or indirect methods for calculating cash flows from operating activities affect the investing and financing activities sections of the statement of cash flows?

Answer: No impact.

• Investing activities are identical under the direct and indirect methods. 

• Financing activities are identical under the direct and indirect methods.

• Choice of direct or indirect method affects ONLY the operating activities section of the cash flow statement.