Two routes to the same cash figure
Cash from operations can be found by counting the cash that moved or by correcting the profit. This lesson builds both for one shop, shows why they must agree, and then opens Info Edge's and Titan's statements to see what the corrections are really doing.
- Level
- Beginner
- Reading time
- About 23 minutes
- Know this first
- The cash flow statement
By the end you will be able to:
- work out cash from operations by the direct method and by the indirect method
- explain why the two methods always give the same figure
- sort the adjustments in an indirect statement into non-cash items, items that belong to investing and items that belong to financing
- say why a profit figure needs correcting for interest before it becomes operating cash
Two routes to one number
The first section of a cash flow statement answers one question: how much cash did the business produce by running its trade? There are two honest ways to find out. You can count the cash: add up what came in from customers and subtract what went out to suppliers, staff and the tax office. Or you can correct the profit: start from the profit in the income statement and remove everything in it that was not cash. The first is the direct method. The second is the indirect method.
The lesson on cash vs profit and the lesson on the cash flow statement followed the second route and mentioned the first. This lesson takes both seriously. It builds them side by side, shows why they cannot disagree, and then uses two real statements to look at the corrections themselves, which are the part most readers skip over.
Build it both ways
Below is Meena's shop in its first full year. Goods cost 60% of the selling price. Wages and rent come to ₹1,50,000 and are paid in cash. The fittings lose ₹40,000 of value as depreciation, which is charged against profit but never paid out. The shop starts the year with no stock and no one owing it or being owed anything. Change the sales, how much customers still owe at the year's end, how much stock is unsold, and how much of the year's buying is not yet paid for.
Counting the cash that moved: ₹6,00,000 came in from customers, ₹4,20,000 went out to suppliers and ₹1,50,000 to staff and landlord, leaving ₹30,000. Starting from profit of ₹1,30,000 and correcting it gives ₹30,000. The two routes agree.
Move any slider and the two totals move together. Set customers owing to 0%, suppliers unpaid to 0% and stock to ₹50,000, and the indirect corrections shrink, but the two totals still match. There is no setting at which they differ, and the next section shows why.
Why they must agree
Every line of the income statement has a twin in the cash. Each correction in the indirect method is just the gap between the two.
| Income statement line | Its cash twin (direct) | The gap (indirect correction) |
|---|---|---|
| Sales | Cash received from customers | Less what customers still owe at the year's end |
| Cost of goods sold | Cash paid to suppliers | Less stock bought and not yet sold, plus what suppliers have not yet been paid |
| Wages and rent | Cash paid to staff and landlord | None here, as they were paid as they arose |
| Depreciation | Nothing: no cash leaves | Add the whole charge back |
Put the four rows together and the direct total is the profit with the four gaps applied, which is precisely what the indirect method does. They are one calculation, written in two orders. If a statement's two versions ever disagreed, it would mean a line had been left out of one of them.
Which one companies use
Both companies in this course, Titan and Info Edge, publish the indirect version. Their statements begin with a profit figure and work downwards, and neither lists a line such as "cash received from customers". So there is no real direct statement in the filings to show you, and this lesson does not make one up. The shop above is the direct method in full.
The indirect method is popular for practical reasons. It needs only the income statement and two balance sheets, which every company already has, while a direct statement needs the company to track its cash by class throughout the year. It also does a second job for a reader: it shows why profit and cash differ, which the direct statement cannot do on its own. The direct method has its own strength. It states plainly how much came in from customers and how much went out to suppliers. Which is better is a matter of what the reader wants to know. This lesson's point is that the choice changes the presentation and never the answer.
What the corrections are really doing
In the shop, the corrections were easy to name: depreciation and three working capital balances. In a real statement the list is longer, and it holds a third kind of item that the shop did not have. A company's profit contains things that are not about running the trade at all. It includes interest earned on deposits, gains on investments and interest paid on borrowings. Those belong in the investing and financing sections, so the indirect method takes them out of the starting profit, and the other sections put in whatever actually moved.
The tables below place every adjustment in Titan's and Info Edge's statements in one of three groups: costs and credits that involve no cash, income and gains that belong to investing and finance costs that belong to financing. Info Edge also has two small lines whose nature the statement does not make clear, shown separately instead of guessed.
| ₹ crore | FY2023-24 | FY2022-23 |
|---|---|---|
| Profit before tax | 4,607 | 4,465 |
| Costs and credits that involve no cash | 471 | 349 |
| Income and gains that belong to investing | (442) | (240) |
| Finance costs that belong to financing | 480 | 240 |
| Operating profit before working capital changes | 5,116 | 4,814 |
| ₹ million | FY2023-24 | FY2022-23 |
|---|---|---|
| Profit before exceptional items and tax | 11,303.92 | 9,106.79 |
| Costs and credits that involve no cash | 1,082.21 | 1,269.06 |
| Income and gains that belong to investing | (2,546.30) | (1,664.67) |
| Finance costs that belong to financing | 163.11 | 38.89 |
| Not grouped here | (35.92) | (52.90) |
| Operating profit before working capital changes | 9,967.02 | 8,697.17 |
The two companies look different here. For Titan, the corrections are small against a profit of ₹4,607 crore, and two of the three groups nearly cancel: finance costs of ₹480 crore are added back, and about as much income is taken out. Info Edge's statement removes ₹2,546.30 million of income and gains in FY2023-24, mostly interest on its large deposits and other financial assets plus gains on investments, and adds back ₹1,082.21 million of items that involve no cash. Net of everything, the corrections reduce the starting profit of ₹11,303.92 million by ₹1,336.90 million, to an operating profit before working capital of ₹9,967.02 million. The largest reduction is income earned on money the business has put aside, which the statement files under investing.
Here is the full list of Info Edge's adjustments, with the group each falls in.
| Adjustment (₹ million) | Group | FY2023-24 | FY2022-23 |
|---|---|---|---|
| Depreciation and amortisation expense | Costs and credits that involve no cash | 677.38 | 447.41 |
| Interest on borrowings | Finance costs that belong to financing | 2.35 | 1.23 |
| Interest on lease liability | Finance costs that belong to financing | 160.76 | 37.66 |
| Interest income on fixed deposits | Income and gains that belong to investing | (1,987.64) | (1,404.65) |
| Interest income on other financial assets | Income and gains that belong to investing | (51.63) | (59.82) |
| Net gain on disposal of property, plant and equipment | Income and gains that belong to investing | (1.18) | (1.48) |
| Gain on disposal of right-of-use asset | Not grouped here | (2.44) | 0.00 |
| Miscellaneous income | Not grouped here | (33.48) | (52.90) |
| Net gain on financial assets mandatorily measured at FVTPL | Income and gains that belong to investing | (488.62) | (186.06) |
| Unwinding of discount on security deposits | Costs and credits that involve no cash | (12.02) | (10.79) |
| Interest income on deposits with banks made by ESOP Trust | Income and gains that belong to investing | (17.23) | (12.66) |
| Bad debts, net of reversal of provision for doubtful debts | Costs and credits that involve no cash | (10.20) | 38.16 |
| Share based payments to employees | Costs and credits that involve no cash | 427.05 | 794.28 |
Two of Info Edge's lines are worth a closer look. Share based payments were ₹427.05 million in FY2023-24 and ₹794.28 million a year earlier. They are a real cost in the income statement, a charge for shares and options given to staff, but the company pays no cash for them in the year, so they are added back. Depreciation, at ₹677.38 million, is the other large one.
Where the removed items turn up
If interest income is taken out of operating profit, the cash that did arrive has to be counted somewhere else, or it would vanish from the statement. It is counted in the investing section as interest received, and interest paid appears in financing. The tables below set the amount taken out beside the amount counted in the other section.
| ₹ million | FY2023-24 | FY2022-23 |
|---|---|---|
| Interest income taken out of operating profit (Info Edge) | 2,039.27 | 1,464.47 |
| Interest received, shown under investing | 1,929.10 | 1,574.31 |
| Interest on lease liability added back (Info Edge) | 160.76 | 37.66 |
| Interest on lease liability paid, shown under financing | 160.76 | 37.66 |
| ₹ crore | FY2023-24 | FY2022-23 |
|---|---|---|
| Interest income taken out of operating profit (Titan) | 239 | n/a |
| Interest received, shown under investing | 209 | n/a |
| Finance costs added back (Titan) | 480 | n/a |
| Finance costs paid, shown under financing | 480 | n/a |
Some pairs match to the paisa. Info Edge adds back ₹160.76 million of lease interest and pays exactly that in financing, and Titan adds back ₹480 crore of finance costs and shows the same ₹480 crore as finance costs paid. Others are close, but not equal. Info Edge took ₹2,039.27 million of interest income out of operating profit in FY2023-24 and received ₹1,929.10 million, ₹110.17 million less. In FY2022-23 it was the other way round: it received ₹1,574.31 million against ₹1,464.47 million taken out, ₹109.84 million more. Titan took out ₹239 crore and received ₹209 crore.
The usual reason for a gap like this is timing: interest earned in one year can be received in another. That is the same accrual gap that the lesson on accrual vs cash accounting described, and it shows up in the working capital lines. The filings do not itemise the difference, so this lesson does not claim the cause for these particular figures. What matters for a reader is the structure: nothing in an indirect statement is lost, and each item removed from the operating section is counted again in the section it belongs to.
The indirect method in three companies
Of the two ways to present operating cash flow, nearly all large listed companies use the indirect method, which starts from net income and adjusts it. The table shows the adjustments in the reports of Apple, Microsoft and Toyota. Brackets mean the item reduced operating cash flow. Toyota's summary groups its adjustments differently, so everything other than net income and depreciation is shown as one combined line.
| Latest year, millions of each currency | Apple ($) | Microsoft ($) | Toyota (¥) |
|---|---|---|---|
| Net income | 112,010 | 101,832 | 4,789,755 |
| Depreciation and amortisation | 11,698 | 34,153 | 2,251,233 |
| Share-based compensation | 12,863 | 11,974 | within the rest |
| Other non-cash items | (89) | (6,447) | within the rest |
| Changes in working capital | (25,000) | (5,350) | within the rest |
| Everything else, combined | (3,344,054) | ||
| Cash from operations | 111,482 | 136,162 | 3,696,934 |
The pattern across the three is plain. Depreciation and amortisation always add back, because they reduce profit without any cash leaving. At Apple, depreciation and share-based pay together add $24,561 million and the change in working capital takes away $25,000 million, so the result is almost the same as net income. At Microsoft, depreciation alone is large enough to lift operating cash flow well above net income, partly offset by other non-cash items of minus $6,447 million and a working capital outflow of $5,350 million. At Toyota, the combined line is minus ¥3,344,054 million, and the largest identifiable part of it is the ¥2,389,665 million lent out by the financial services arm.
What the standards say about the two methods
Both US GAAP and IFRS allow either method, and both encourage the direct method, which lists cash received from customers and cash paid to suppliers and employees. Few large companies use it, typically because the accounting records are kept on an accrual basis and the indirect method is cheaper to prepare. The two rulebooks differ in what they require alongside. Under US GAAP, a company using the direct method must also give the reconciliation of net income to operating cash flow, so the information in the table above is always available. Under IFRS, the reconciliation is required only for the indirect method.
This matters for an analyst more than for a student. A company that uses the direct method under IFRS gives a clearer view of its customers' payments and supplier payments but may not show the bridge from profit. A reader comparing across countries should expect the indirect method and look for the reconciliation.
The method does not change the total. Both reach the same operating cash flow, since the difference is only in the route. What the indirect method gives, and the direct method does not, is a view of why profit and cash differ, and that is the question this module keeps coming back to.
Common mistakes
Thinking the indirect method gives a different answer
It does not. It is the direct calculation in a different order. If a published statement used one method and you rebuilt the other, you would get the same total.
Adding depreciation back as if it were cash coming in
Depreciation is added back because it was subtracted from profit without any cash leaving. It undoes a deduction. It does not add money.
Reading "profit before tax" as the start of every statement
Info Edge starts from profit before exceptional items and tax. Always read the first line, and see what it leaves out.
Treating the signs of working capital lines as quality judgements
A rise in receivables takes cash out of the operating section, but it may reflect healthy growth. The sign says where the cash went, not whether that was wise.
Forgetting that removed items reappear elsewhere
Interest taken out of operating profit is counted again as interest received in the investing section. A reader who looks only at the operating section sees a smaller number than the company's total cash earnings.
Try it yourself
1. In a year, a shop received ₹5,00,000 from customers, paid ₹3,20,000 to suppliers and ₹80,000 to staff and the landlord. What is its cash from operations by the direct method?
Show the working
₹5,00,000 − ₹3,20,000 − ₹80,000 = ₹1,00,000.
2. Another business has a profit of ₹60,000 and depreciation of ₹20,000. Its receivables rose by ₹35,000 and its inventory by ₹15,000, and its payables rose by ₹10,000. What is its cash from operations by the indirect method?
Show the working
₹60,000 + ₹20,000 − ₹35,000 − ₹15,000 + ₹10,000 = ₹40,000. Rising receivables and inventory use cash. Rising payables, which delay a payment, provide it.
3. In Info Edge's statement the interest income on fixed deposits is a deduction of ₹1,987.64 million in FY2023-24. Why is interest income taken away from profit when it is real money?
Show the working
It is real money, but the statement counts it in the investing section as interest received. If it stayed in the operating figure as well, the same cash would be counted twice. The deduction moves it from one section to the other.
4. Titan adds back finance costs of ₹480 crore in the operating section. Where does the cash for them appear?
Show the working
In the financing section, as "finance costs paid", at the same ₹480 crore. The cost is in profit, so it is added back from the operating section and subtracted in financing.
Where this is used
- A small business owner works out cash from operations directly from the bank statement, which is often the easiest route, because the bank already lists each receipt and payment.
- A finance team builds a forecast by projecting profit and then the working capital balances, which is the indirect method run forwards.
- An analyst checks that the corrections in a company's statement are the sort of lines expected for its business, and looks hard at any large unexplained one.
- An auditor compares the cash flow statement with the income statement and balance sheet and confirms every correction has a counterpart.
Key terms
- Direct method
- Reporting cash from operations as gross receipts less gross payments, listed by class.
- Indirect method
- Reporting cash from operations by starting with profit and correcting it.
- Gross
- The whole amount that moved, not the net of receipts and payments.
- Non-cash item
- A cost or credit in the income statement with no cash movement in the year, such as depreciation.
- Share based payment
- A charge for shares or options given to staff, recorded as a cost but not paid for in cash.
- Working capital change
- The movement in receivables, stock, payables and similar balances, which delays or advances cash.
- Exceptional item
- A large or unusual gain or loss shown on its own line in the income statement.
Questions people ask
Which method is better?
Neither gives a better answer. The direct method is clearer about what came in and went out. The indirect method is easier to prepare and shows the link to profit. International standards allow both, and in practice the company decides.
Why does Info Edge start from a different profit figure than Titan?
Each company chooses where its statement begins, and both are acceptable if applied consistently. What matters is to know the starting line before comparing two statements.
Is cash from operations affected by tax?
Yes. Both statements subtract income tax paid after reaching cash generated from operations. Info Edge paid ₹3,022.99 million of tax in FY2023-24, and Titan ₹1,140 crore.
If I only have the bank statement, can I still use the indirect method?
Yes, but you would need the profit and the balance sheet changes as well. With only a bank statement, the direct method is the natural choice.
Sources and review
- IFRS Foundation, IAS 7, Statement of Cash Flows, for the description of the direct and indirect methods and the quoted wording.
- Info Edge (India) Limited, audited standalone financial statements, Q4 FY24. Source of every Info Edge adjustment, working capital, investing and financing line.
- Titan Company Limited, audited results with statements of cash flows for the year ended 31 March 2024, filed with BSE. Source of every Titan adjustment, interest received and finance costs paid.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
- Deloitte, Roadmap: IFRS and US GAAP comparison, 4.3 Statement of cash flows, for the classification of interest and dividends.
How the numbers were checked: every adjustment line for both companies was added up and matches the printed operating profit before working capital changes. Each grouping in the tables was rebuilt from the lines and adds to the same total. The calculator's two methods were compared on thousands of slider combinations and never differed.