What are typical items included in the cash flow from operating activities under the indirect method?

• A. Net income, non-cash items (like depreciation), and changes in working capital (receivables, inventory, payables)
• B. Financing and investing activities
• C. Net income only
• D. Cash inflows from customers and cash outflows to suppliers

Answer: (A)

Under the indirect method, cash flow from operating activities starts with net income and then adjusts for items that affect cash but not net income. You add back non-cash charges (like depreciation) because they reduce net income without using cash, and you adjust for changes in working capital—receivables, inventory, and payables—since these accounts impact cash yet aren’t reflected as separate cash payments in net income. Together, net income plus these non-cash items and working capital changes show the cash generated from operations. Financing and investing activities are kept separate, and simply listing cash inflows from customers or outflows to suppliers isn’t how the indirect method presents operating cash flow—their effects are captured through changes in receivables, inventory, and payables.