How are operating cash flows determined?

The cash flows from operating activities can be presented under the direct or the indirect method.  The direct method is the preferred method because the information it provides is more useful.  However, the indirect method is more commonly used.

The direct method of determining net cash from operating activities shows each major class of gross cash receipts and gross cash payments.  Its presents those items that directly affected the cash flow and the size of those cash flows.

Cash Flows from Operating Activities – Direct Method (Illustration)
Cash Receipts from Customers	xxx
Cash Paid to Suppliers	(xxx)
Cash Paid to Employees	(xxx)
Cash Generated from Other Operating Activities	xxx
Interest Paid	(xxx)
Income Taxes Paid	(xxx)
Net Cash from Operating Activities	xxx

Net cash from operating activities using the indirect method.  It is determined by adjusting accrual basis net profit or loss for the effects of noncash transactions, such as any deferrals or accruals of past or future operating cash receipts or payments and items of income or expense associated with investing or financing activities.

Under US GAAP, interest paid and received and dividends received are classified as operating cash flows.  Under IFRS, interest and dividends paid can be classified either as operating or financing cash flows while interest and dividends received can be classified either as operating or investing cash flows.

Cash Flows from Operating or Financing Activities
Transaction	US GAAP	IFRS
Interest Paid	Operating	Operating or Financing
Interest Received	Operating	Operating or Investing
Dividends Paid	Financing	Operating or Financing
Dividends Received	Operating	Operating or Investing