Three statements Updated November 2026

Cash flow from operations

Cash flow from operations (indirect method) = net income + depreciation and amortization + other non-cash charges (stock compensation, deferred taxes) - increases in operating assets + increases in operating liabilities. It converts accounting profit into the cash the business actually generated.

Syntax

CFO = Net income + D&A + non-cash items - change in NWC

Part	What it is
`Net income`	Bottom line of the income statement
`D&A`	Non-cash depreciation and amortization, added back
`change in NWC`	Increases in receivables and inventory subtract; increases in payables add

Examples

Net income 90, D&A 50, AR up 20, inventory down 10, AP up 15
=90 + 50 - 20 + 10 + 15

Result: 145

Add stock-based compensation of 5 and a deferred tax expense of 3
=145 + 5 + 3

Result: 153

Closing cash: opening 100 + CFO 145 - capex 120 + financing 0
=100 + 145 - 120

Result: 125

Common mistakes

Subtracting an increase in payables: liabilities growing means cash was kept, so it is an add.
Adding back interest: in US GAAP interest paid stays inside CFO, so it is not added back (it is already in net income).
Double counting D&A when EBITDA, not net income, is the starting point.

Practice Cash flow from operations

These drills check your answer on live data, free, no account needed.

Cash flow from operationsNet working capital balances are given for each year end, including 2025. Fill the change in working capital (row 8) and cash flow from operations (row 9): net income plus depreciation less the increase in working capital.
Cash roll-forwardRoll cash forward. Outflows are already negative. Closing cash (row 10) is opening cash plus all the flows in rows 6 to 9. Each later year opens with the prior closing cash.

Questions

What is the difference between CFO and free cash flow?

FCF = CFO - capex. CFO is before investment in fixed assets; FCF is after it.

Can CFO be higher than net income?

Yes, and it usually is, because depreciation and other non-cash expenses are added back. CFO well below net income over several years is a red flag for earnings quality.

Free cash flowFree cash flow is cash from operations minus capital expenditures. The simple formula, the free cash flow to equity version and examples with exact numbers.
Change in net working capitalChange in NWC = NWC this year - NWC last year. An increase uses cash and is subtracted in free cash flow; a decrease releases cash. Formula, examples, signs.
EBITDA to net incomeNet income = EBITDA - D&A - interest - taxes. Each step of the bridge (EBIT, EBT, tax at the rate, net income) with exact numbers and the tax-on-losses rule.
Three-statement modelHow a three-statement model links net income, depreciation, capex, working capital, debt and cash so the balance sheet balances. Build order, links, check.