The statement of cash flows normally starts from the operating income, which in itself includes numerous expenses and income. As it happens though, the income statement is based on accrual based accounting, whilst the statement of cash flows displays the actual cash movements. So you have to either make adjustments or remove certain lines or items from the income statement to move it closer to reflect the actual cash movement.

Now whilst some of those expenses and income are classified within other part of the statement, there are some movements on the income statement, which include no cash movement whatsoever and as a result should be adjusted from the operating income for it to show cash flows from the operating activities.

For an example, one of those is the depreciation. It’s something that doesn’t involve any cash movement, so it should always be added back the operating income. If the operating income for an example is even an operating loss (say – 10,000), you add the depreciation to it (say it’s 12,000) reaching an adjusted operating income on the statement of cash flows (in our example 2,000 (-10,000 + 12,000 = 2,000)).

There are other types of non-monetary movements out there so take a good look at your income statement when listing the “adjustments” on the statement of cash flows.