Question

Please provide your understanding on cashflow from Operating, Investing and Financing activities and why we add Depreciation and Amortization in the net income?

Answer 1

While preparing cash flow statement, sources and uses of cash are divided into 3 categories: operating, investing and financing activities.

Cash flows from operating activities consists of sources and uses of cash from operating activities of the company i.e. from the activities the business deals in.

Cash flows from investing activities consists of inflow and outflow of cash from long term investments such as sale and purchase of fixed assets etc.

Cash flows from financing activities consists of inflow and outflow of cash generated from the raising and repayment of capital such as issue of shares, debentures etc.

While preparing cash flow from operating activities using indirect method, the depreciation and amortization expense is added to net income as it is a non cash expenditure.

Depreciation and amortization expense is deducted while calculating net income but it doesn't lead to outflow of cash. That's why depreciation and amortization expense is added back to net income while calculating cash flow from operating activities