### Cash Flow From Operating Activities

The first section of cash flow statement, known as cash flow from operations or operating activities, can be calculated by using both the indirect and direct methods:

1) Direct Method Formula:
Cash Flows from Operating Activities = Cash receipts from customers - Cash paid to suppliers - Cash paid to employees - Other cash payments

Example:
Given the following information, calculate the cash flow from operations using direct method:
Net Sales \$800,000
Credit Purchases \$60,000
Opening Accounts Receivable \$55,000
Closing Accounts Receivable \$95,000
Opening Accounts Payable \$85,000
Closing Accounts Payable \$45,000
Opening Salaries Payable \$150,000
Closing Salaries Payable \$120,000
Salaries Expense \$400,000
Beginning Interest Payable \$25,000
Closing Interest Payable \$30,000
Interest Expense \$75,000

Solution:
Cash Receipts from Customers = Net Sales + Opening Accounts Receivable - Closing Accounts Receivable = 800,000 + 55,000 - 95,000 = \$760,000
Cash paid to suppliers = Opening Accounts Payable + Credit Purchases - Closing Accounts Payable = 85,000 + 60,000 - 45,000 = \$100,000
Cash paid to employees = Opening Salaries Payable - Closing Salaries Payable + Salaries Expense = 150,000 - 120,000 + 400,000 = \$430,000
Other cash payments (Interest) = Beginning Interest Payable - Closing Interest Payable + Interest Expense = 25,000 - 30,000 + 75,000 = \$70,000
Cash Flows from Operation = 760,000 - 100,000 - 430,000 - 70,000 = \$160,000

2) Indirect Method Formula:
Cash Flows from Operating Activities = Net operating profit + Depreciation/Amortization + Loss on disposal of fixed asset - Profit on disposal of fixed asset + Increase in Current Liabilities - Decrease in Current Liabilities - Increase in Current Assets + Decrease in Current Assets

Example:
Given the following information, calculate the cash flow from operating activities using indirect method:
Net operating income \$200,000
Depreciation expense \$5,000
Loss on sale of motor vehicles \$4,000
Increase in Prepaid Insurance \$2,500
Decrease in Prepaid Rent \$3,000
Decrease in Accounts Payable \$8,000
Decrease in Accounts Receivable \$5,000

Solution:
Cash Flows from Operating Activities
= Net operating income + Depreciation + Loss on sale of motor vehicles - Increase in Prepaid Insurance + Decrease in Prepaid Rent - Decrease in Accounts Payable + Decrease in Accounts Receivable
= 200,000 + 5,000 + 4,000 - 2,500 + 3,000 - 8,000 + 5,000
= \$206,500

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