Question

Which of the following formulas describes the calculation of cash flow from operating activities?

1) Cash flow from operating activities = Net income + Non-cash expenses - Changes in working capital
2) Cash flow from operating activities = Net income + Depreciation - Changes in working capital
3) Cash flow from operating activities = Net income + Changes in working capital - Non-cash expenses
4) Cash flow from operating activities = Net income + Changes in working capital + Non-cash expenses

Answer 1

The correct formula to calculate cash flow from operating activities is Net income + Non-cash expenses - Changes in working capital, which corresponds to option 1 of the provided choices.

Step-by-step explanation:

The correct formula for calculating cash flow from operating activities is: Cash flow from operating activities = Net income + Non-cash expenses - Changes in working capital. Option 1 presents the correct formula. This calculation starts with the net income, adjusts for any non-cash expenses such as depreciation and amortization, and accounts for the changes in working capital, which include changes in current assets and current liabilities. The changes in working capital reflect the cash used in or provided by the company’s operations beyond what is reported as net income.